NewBuy can boost housing supply, says government
Published: 14 March 2012 | Author: Bernard Clarke
On Monday, five of the UK’s largest mortgage lenders announced plans to participate in the NewBuy scheme, launched by the Department for Communities and Local Government (DCLG), with the support of builders and the CML. The scheme will make 95% mortgages more readily available on newly-built homes by introducing a guarantee fund.
NewBuy was supported on launch day by Barclays, Nationwide Building Society and NatWest Home Loans Ltd, with each of these lenders publishing details of the mortgages they are offering under the scheme. Additionally, Halifax and Santander have said they are planning to join the scheme in the coming weeks (which means that NewBuy is already supported by firms whose parent companies are responsible for more than 70% of mortgage lending in 2010). Participation in the scheme is not restricted, and other lenders will be able to consider joining it in the months ahead.
We have worked closely with DCLG and the Home Builders' Federation (HBF) on the scheme in recent months, and on Monday published a consumer fact sheet, freely available on our website, to help buyers decide whether NewBuy can be of value to them. The fact sheet has been crystal marked for clarity by the Plain English Campaign, and is freely available for lenders to use in their own consumer information, if they wish.
On Monday, the HBF announced that 10 builders are participating in the scheme. As is the case with lenders, more construction firms are expected to sign up to the scheme in the coming months.
The launch of NewBuy was announced by the prime minister, David Cameron, and the housing minister, Grant Shapps. On the same day, ministers also unveiled a fresh impetus for the right to buy scheme, with more generous discounts for buyers.
How does NewBuy work?
The scheme will be open to all buyers of newly-built property, with an upper price limit of £500,000. Those buying through NewBuy will be able to take out a mortgage of between 90% and 95% of the value of the property, compared to loans of between 75% and 85% that most lenders will typically advance on newly-built homes.
Buyers under the scheme will have exactly the same responsibilities as other borrowers, and will need to keep up with their monthly repayments. If they are unable to do so and the lender is forced to take possession of the property and sell it, the borrower will remain liable for repaying any shortfall – just like any other mortgage customer.
All loans advanced under the NewBuy scheme will comply fully with regulatory requirements for mortgage lending. Like other mortgages, NewBuy loans will be overseen by the Financial Services Authority (FSA), which will ensure there is compliance with all consumer protection measures.
NewBuy is open to all lenders and established builders operating in England. Within the framework of the scheme, lenders and builders choosing to take part are free to form their own partnerships and devise their own commercial arrangements.
Under the rules of the scheme, builders will pay 3.5% of the sale price into an indemnity fund for each property sold, and the government will provide additional security for the mortgage in the form of a 5.5% guarantee. The government has said it could guarantee up to 100,000 purchases through the scheme over three years.
If the buyer cannot keep up with the mortgage repayments and the property is taken into possession, the lender will be able to recover the majority of its losses from the builder’s fund, and then call on the government guarantee. If no claim is made on the builder’s fund within seven years, contributions paid into it will be returned to the construction firm.
What can NewBuy deliver?
The government says that the scheme is intended to boost housing supply and improve access to mortgages to those who can afford repayments but do not have large savings. It has estimated that one million people, including 380,000 first-time buyers, could afford regular mortgage repayments but are excluded from the housing market because they do not have a large enough deposit.
In our view, the main advantages of NewBuy are that it will:
- Increase the supply of new housing, with builders having greater confidence that mortgages will be available to finance the sale of properties they build. The HBF has estimated that this will create 50,000 jobs on building sites, with more coming in the construction supply chain.
- Enable lenders to advance a higher proportion of the purchase price without the higher level of risk that would usually arise. One of the key benefits of this is that the FSA has agreed that some large lenders will not have to hold as much capital as would normally be required for 90% or 95% mortgages. New requirements on lenders to hold more capital for higher loan-to-value lending have restricted mortgage availability, particularly for mortgages of 90% or more. Capital requirements can also make these mortgages more expensive.
Our consumer fact sheet explains to borrowers that they may be able to purchase a property with a deposit of between 5% and 10% if they meet the lender’s affordability criteria. The scheme is available on newly-built homes as long as:
- it is a "standard" purchase, and not funded through shared equity or shared ownership;
- the property will be the main residence of the buyer, not a second home or a buy-to-let investment;
- the buyer is a UK citizen, or has "indefinite leave to remain in the UK"; and
- the deposit has been saved without any help from a local or public authority.
Incentives, valuation and high LTV lending
Our consumer fact sheet suggests that NewBuy is likely to be more suitable for people who expect to stay in the property for a while, rather than those who plan to move again soon. Borrowers considering taking out a 90% or 95% mortgage should be aware that some newly-built properties include a premium on the sale price that can be reduced as soon as someone moves into the property.
If house prices fall, the borrower may not be able to raise enough by selling the property to pay off the mortgage entirely. Having only a small amount of equity in your home – or being in negative equity – is likely to make it more difficult to move to another property or to remortgage.
With transactions funded through NewBuy, builders are not allowed to offer any additional financial incentives to the buyer. It is still possible for the buyer to negotiate a reduction on the sale price, as long as the lender is aware of this. But the lender will take all relevant matters into account, including the price paid, when determining whether they accept the valuation of the property and whether the mortgage application fits its lending criteria.
Robust and reliable valuation of property is always an important issue for lenders and borrowers, but becomes even more significant with high LTV lending. We therefore welcome the advice given by the Royal Institution of Chartered Surveyors (RICS) to its members on the launch of NewBuy this week.
Referring to mortgages supported by indemnities or other financial incentives, RICS said:
"Valuers need to be aware of the availability of such schemes, record their existence, make appropriate inquiries on their use within a particular development as part of their analysis of comparable data, and consider any effect they may have on market conditions and on market value.
"Part of that analysis should be to consider whether or not such products positively discriminate in favour of the new-build market to the extent that they might lead to unsustainable market and price distortions."
We agree that valuers should ensure they carefully assess the impact of NewBuy (and any other indemnity or incentive schemes) and urge RICS to ensure that its guidance is carefully followed.
We also agree with the DCLG’s decision to establish a monitoring group to keep the operation of NewBuy under review. We would expect this group to take a close interest in any potential market distortions or side-effects created by the scheme.
Right to buy
As part of Monday’s announcement, the DCLG also announced that tenants wanting to purchase their home through the right to buy scheme could benefit from enhanced discounts of up to £75,000. Right to buy discounts are currently limited by caps, ranging from £16,000 in most of London to £38,000 in parts of the south east. Discounts could therefore increase fourfold in London, and by between two and three times in the rest of the country.
The government said it planned to replace homes sold under the right to buy scheme, with funding along the same lines as the affordable homes programme. That would allow social landlords to meet the cost of building new homes by borrowing against future rental income, contributing from their own resources, including land, and with the support of grant funding from the government.
We have no view on the size of discounts available under the right to buy, and support the government’s objective of replacing homes on a one-for-one basis. Participation by lenders in the scheme will depend on their view of how it operates, and the commercial judgement and attitude to risk of individual firms.
Lenders will continue to determine their own criteria for borrowers, properties and geographical areas they will consider for right to buy applications. They will also continue to conform with all the regulatory requirements for mortgages, so there will be no relaxation of lending criteria. The FSA has said that right to buy customers should always get advice, a recommendation we support.
We have worked closely with the government and house-builders for a springtime launch of NewBuy. We are pleased to see that it has been launched successfully this week, with support from individual building firms and lenders.
NewBuy has the potential to increase the supply of housing, to create more jobs on building sites and in the supply of construction materials, and to boost economic activity and growth. The scheme will also improve access to credit by removing the barrier of a large deposit for those borrowers who can afford monthly mortgage repayments but do not have large savings.