Wartime footing

Ray Boulger

March 20, 2020

Ray Boulger is a senior mortgage technical manager at John Charcol

Although the UK and many other countries are on a wartime footing and Trump is even invoking the Defense Production Act, allowing the government to force U.S. companies to ramp up production of medical supplies, at least we can all take precautions against catching COVID-19.

Providing a large majority of the at risk group take the sensible precautions recommended by the government and as more information becomes available over the next few weeks, including more testing kits becoming available, we will get a better idea of when the restrictions can be made less onerous.

However, we need to plan for restrictions lasting several months.

With the Bank Rate being cut from 0.25% to 0.1%, it has little more than phycological benefit, but increasing quantitative easing (QE) by £200bn is far more significant.

The gilt market has been exceptionally volatile over the last few days with wild swings and the QE announcement appears to be having the desired effect but clearly markets are in for a bumpy ride.

This new QE programme combined with the four year Term Funding Scheme with Special Incentives for SMEs announced by The Bank of England on 11 March 2020 and the relaxation of banks’ capital requirements should provide enough liquidity to the banks and other building societies to maintain mortgage lending at current levels.

However, as demand for purchase mortgages will fall sharply, we will see more enquiries regarding remortgages and product transfers.

For those who want to move, or need to for personal reasons, the Help to Buy Equity Share scheme offers an interesting option in the current situation.

This is only available for those purchasing a new build property, but developers will have homes to sell which are due to be completed over the next few months and will not want to mothball part-built properties.

Therefore in a few weeks’ time there could be some good deals available and if developers continue to offer part exchange this would avoid the “chain” problem for movers.

Up to now the Help to Buy scheme has mainly been attractive for those with only a 5% deposit but in the current situation others may find it worth considering.

The English scheme, rules are different in Scotland and Wales, offers a 20% equity share second charge mortgage and 40% in London, and requires buyers to have a minimum deposit of 5% as well as a normal first charge mortgage of at least 25%.
An added advantage for those whose income might suffer as a result of the current crisis is that mortgage payments will be lower as the equity share second charge mortgage is interest free for the first five years.

Anyone choosing this approach should consider carefully when to buy out the government, probably with a further advance or by remortgaging, as the equity share option is unlikely to be ideal over the medium to long term.

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