Published: 17 August 2016 | Author: Mohammad Jamei
The Help to Buy mortgage guarantee scheme is set to close at the end of this year. Relatively little has been said about it, compared to its sibling, the equity loan scheme. We thought it would be a pity if its planned demise went unnoticed.
The mortgage guarantee scheme was introduced to help with the lack of supply of higher loan-to-value (LTV) mortgages back in 2013. It was announced as a temporary scheme across the UK, aimed at addressing a specific problem that was cyclical. The view was to close it in three years’ time, that is, by the end of 2016.
It offers lenders insurance in the event that a property covered by the scheme is taken into possession. The insurance covers down to 80% of the property’s value at the time of purchase, with the lender taking a 5% share of any losses. The value of any property under the scheme is capped at £600,000 and in June 2014, the maximum loan-to-income (LTI) was capped at 4.5 times borrowers’ income, following the LTI caps introduced by the Bank of England.
Lender participation is optional, which, in itself, is rather different to other schemes where lenders would be encouraged to sign up. Lenders are charged a commercial fee if they participate, to cover the cost of running the scheme.
The aim has been to help would-be – and creditworthy – home-owners with a small deposit to transact or get on the housing ladder. These people might otherwise be locked out of the market.
Chart 1: Take-up of mortgage guarantee scheme since launch
Source: HM Treasury, CML calculations
The government was prepared to take on £12 billion of contingent liability, which HM Treasury estimated would allow for up to £130 billion of loans under the scheme. After more than two and a half years, take up has been modest, and has been slowing in recent months.
Government housing schemes usually go one of two ways. They either work very well and the market becomes somewhat dependent on them, which means that removing them risks causing market disruption. Or they have little impact and fall by the wayside.
So far, under the scheme:
- there has been nearly 79,000 loans made, with 95% of them outside of London,
- the average LTV has been 94%, compared to an LTV of 65% for loans outside of the scheme,
- the average age of a borrower has been 30, compared to 38 outside of the scheme,
- nearly 80% of borrowers have been first-time buyers.
In this sense, the scheme has had a positive effect in encouraging the return of higher LTV lending, largely focused outside London, predominantly helping first-time buyers, and capable of closing down without causing much disruption as lenders now offer many high LTV products outside of the scheme.
We focus on how the scheme has supported first-time buyers, as they make up about 80% of all scheme participants.
Before the crisis, these buyers had enjoyed the ability to borrow at high LTV for nearly a quarter of a century. Then, during the crisis there was a large drop, and the average LTV for new loans declined to 75% in 2009. While there has been a recovery in the average LTV since then, it remains lower than the pre-crisis average (see Chart Two below).
Chart 2: Average loan-to-value for new first-time buyer loans (%)
The post-crisis recovery in higher LTV lending has been helped by the mortgage guarantee scheme. More recently, there is perhaps less of a need for it. The number of loans under the scheme has fallen, but high LTV lending continues to be strong (see Chart Three below).
Chart 3: Proportion of high LTV loans to first-time buyers
Source: CML, CML calculations
The scheme helps people who perhaps cannot rely on the bank of mum and dad, when saving up a deposit for a house. As a result, the characteristics of those using the scheme are different to that of a ‘typical’ first-time buyer.
When looking at the scheme across the UK, it seems at first glance that those using it borrow £6,000 less on average than those borrowing outside of the scheme. On a regional basis, however, first-time buyers using the scheme borrowed more than those not using the scheme.
How? Metrics comparing the mortgage guarantee scheme with first-time buyers across the country are distorted by London. For this reason, it can be somewhat misleading to provide comparisons on a UK-wide basis. Regional figures provide a clearer picture, especially given the scheme’s weighting away from London.
Table 1: First-time buyer loans sizes in and out of the scheme in Q1 2016
|East of England||£202,000||£178,000|
|Yorkshire and The Humber||£120,000||£110,000|
In every region, the average loan size for those buying under the scheme is higher, while the value of properties bought is lower than for those buying outside of the scheme.
Why? This is to be expected as nearly everyone using the scheme takes out a 95% loan, so their property value is not much higher than the loan size. Those outside of the scheme on average borrow at 75% LTV so, while their loan size in each region is smaller, their house price is higher.
Closure of the scheme
The fact there are lenders operating outside of the scheme is no bad thing. The scheme played a key role in jump starting higher LTV lending at a time when confidence around house price growth – and the economy – was low. But, as time went on, it has also been important for lenders to operate outside of the scheme, which shows confidence has returned to the market.
As a result, the distortion caused by closing the scheme is likely to be small. It is likely that some would-be buyers will bring their plans forward at the end of this year, which will cause a small drop-off in loans in the first few months of 2017. But given the disruption caused by the change in stamp duty, this is likely to be a small blip in comparison.
In this post-Brexit world of uncertainty, an insurance scheme like this could be helpful when there is likely to be a general edging down of risk appetite. But given the relatively high commercial fees lenders pay to be part of the scheme, and the recovery of high LTV lending, it is hard to make an argument for the continuation of the scheme as it is currently set up.