You have to hand it to the ministers of the coalition government, they are good at launching schemes. This latest, NewBuy, follows FirstBuy and HomeBuy, neither of which, sadly, reinvigorated the housing market and didn’t really help as many people as one might have hoped. With this collection of ineffective initiatives it is tempting to conjure up more ideas for schemes; Can’tBuy, for most people under 40, OldBuy, to help those reaching retirement, or even MegaBuy for bankers and politicians on high salaries. However, for the housing industry, it is no laughing matter.
All these schemes were well intentioned, but they do not assist the vast majority of people who want to sell a house and buy another, they only help first time buyers, lenders and housebuilders. The assisted new build purchase may be marvellous, but it is a bit of a one way street, with the construction industry doing relatively well, expecting a 4 per cent growth this year. Persimmon shares rose 6p to 676.75p, Bellway’s rose 23p to 849.75p, Taylor Wimpey’s by 12p to 58p and Barratt shares increased by 6p to 147.75p. Lucky them!
Meanwhile, homeowners with smaller homes are trapped because they can’t sell to the younger generation as they cannot get mortgages without large deposits (and other reasons); while those with larger homes wanting to downsize can’t sell because those owning smaller homes can’t sell or get new mortgages.
Looking back to the beginning of the recession, when mortgage availability shrunk to miniscule levels, one of the reasons given for the decrease in Loan to Value levels on offer was that people had over extended themselves, that 100 per cent and 95 per cent mortgages were a very bad thing, because they created negative equity if prices dropped. It would be better for everyone, we were told, if homes were purchased with larger deposits and smaller mortgages.
Now, not much seems to have changed in the lives of would be homebuyers. Money is still tight, unemployment is a worrying spectre for many, the cost of living seems to increase every week, salaries aren’t rising to balance the books. But suddenly the 95 per cent mortgage isn’t such a bad thing after all.
NewBuy is good news for homebuyers, and potentially good news for jobs and the wider economy too.” Paul Smee, CML
The NewBuy scheme offers buyers just that. Buyers in England (only) may apply for a mortgage of up to 95 per cent to buy a house priced at up to £500,000, with a mortgage indemnity scheme provided by the builders, backed by government money if the builders’ pot becomes exhausted by claims. How is this good practice?
The Council of Mortgage Lenders (CML) has made a good attempt to explain the scheme, publishing a consumer factsheet to “help homebuyers decide whether the NewBuy scheme, recently launched, can be of value to them”. It explains that Barclays, Nationwide Building Society and NatWest Home Loans Ltd will offer mortgages of up to 95 per cent under the scheme.
“NewBuy is designed to enable lenders to undertake higher loan-to-value lending with less risk for creditworthy borrowers who can afford the repayments but who have not accumulated a large enough deposit to obtain a mortgage under the usual lending terms. Lenders will not be relaxing their affordability criteria, but the scheme will enable those who can afford the repayments to have the choice to buy a home sooner than might otherwise be possible.
“NewBuy is good news for home-buyers, and potentially good news for jobs and the wider economy too,” says CML director general Paul Smee.
Launched in Lewisham
The NewBuy scheme was launched at Barratt London’s Renaissance development in Lewisham. Barratt says that around 20,000 potential homebuyers have already pre-registered their interest on the company’s website nationally with the weekly registration rate now hitting 1,500. Prime Minister David Cameron, said, “Strong families and stable communities are built from good homes. That’s why I want us to build more homes and I want more people to have the chance to own their own home.
“It’s no good hoping people will climb the property ladder if the bottom rung is missing. Affordable properties and available mortgages are vital. “So we’re working with leading house builders and lenders to get the scheme underway.
“It’s a vital boost to the housing market, giving people good affordable new homes and backing thousands of jobs in construction in the process.” Gary Patrick, Regional Sales Director at Barratt London said, “This is a significant change for the housing market in London and we are seeing substantial levels of interest.”
“I would urge anyone interested to contact us as soon as possible. We will explain how the new system will work and talk our customers through the reduced deposit requirements.”
What is NewBuy?
People thinking of buying a newly-built home, who do not have a large enough deposit to qualify for a mortgage, may qualify under the NewBuy scheme. They will still need to have saved a deposit of at least 5 per cent of the price of the home they wish to buy.
How does someone buy a new build property under NewBuy?
Home buyers can either visit a participating new-build development or a mortgage lender in the scheme to discuss eligibility, or they can approach a mortgage intermediary who is introducing mortgages under the scheme.
Those wishing to buy a new home under the scheme, and who meet the lender’s affordability and credit criteria, will be eligible for a mortgage loan up to 95 per cent of the purchase price. Lenders will assess mortgages under the scheme in the normal way.
What is an indemnity and what does it mean for the borrower?
A mortgage indemnity protects the lender if, at some future stage, the borrower falls behind with their mortgage payments and the lender has to repossess the property and sell it. This can result in a loss to the lender if the property has to be sold for a value lower than the remaining value of the mortgage. Under NewBuy, the home builder puts aside a proportion of the sale price into a special indemnity fund and, when this is exhausted, Government provides a further guarantee to an agreed level.
If the property is repossessed and sold for less than the amount of the outstanding mortgage debt, the lender can claim on the mortgage indemnity to recover some of its loss. The basic security for the mortgage is the property. The mortgage indemnity, therefore, acts as a form of additional security for the lender.
The existence of the indemnity does not provide any additional protection for the borrower nor protection from repossession. It does not cover the borrower against negative equity or a shortfall between the sale price and the outstanding debt.
In the unfortunate event of a home being repossessed, the borrower will still be responsible for repaying any shortfall between the sale price of the property and the outstanding mortgage debt. This is the same as it would be for any borrower outside the scheme.
What are NewBuy’s eligibility criteria/exclusions?
- To qualify for NewBuy, properties will have to be:
- New build – residential properties being sold for the first time or for the first time in the current form
- Priced up to £500k – but there will be no cap on income
- Full ownership – NewBuy will not be available for shared ownership or shared equity purchases
- Primary homes – NewBuy will not be available for the purchase of second homes, for investors or for buy-to-let purchases.
- Buyers will have to be UK citizens and those with a right to remain indefinitely in the country.
- It will not be possible to use NewBuy in conjunction with any other publicly funded mortgage schemes. NewBuy will not apply to interest-only mortgage products.
Which lenders/builders are participating?
At launch, these lender/ builder relationships were available under NewBuy (more to follow):
Barclays will offer 95 per cent Loan-to-Value mortgages on properties built by Barratt, Bellway, Bovis, Persimmon, Redrow and Taylor Wimpey at 4.99 per cent fixed rate for two years and 5.89 per cent fixed rate for four years
Nationwide who will offer 95 per cent Loan-to-Value mortgages on properties built by Barratt, Bovis, Bellway, Persimmon, Redrow and Taylor Wimpey at just 5.69 per cent fixed rate for three years and 5.99 fixed rate for five years; and
NatWest who will offer 95 per cent Loan-to-Value mortgages on properties built by Barratt, Bellway, Bovis, Linden Homes, Persimmon, Redrow and Taylor Wimpey at just 4.29 per cent fixed rate for two years and 4.99 per cent fixed rate for five years.
“The key thing is that people will no longer need huge deposits of up to 20 per cent. “In practice that means that you could buy one of our new homes at Delta, in Deptford, for example with a deposit of £9,475, or in West London, you could buy a new one-bedroom home at Osiers, in Wandsworth with a deposit of just £14,400.
“This is a game-changing moment for creditworthy buyers who have been understandably frustrated for years about not owning a home of their own.”
Strong families and stable communities are built from good homes. That’s why I want us to build more homes and I want more people to have the chance to own their own home. David Cameron, Prime Minister.
Happy bankers and builders
Barclays Head of Mortgages Andy Gray said the NewBuy Guarantee will: “boost housing market confidence and support the flow of new housing”.
Moray McDonald, Mortgages Director for NatWest expressed the hope that increased demand from the scheme: “will help lift the economy via the construction of additional homes”.
Andrew Baddeley-Chappell, Head of Mortgage Strategy and Policy at Nationwide, said that NewBuy will: “boost the supply of properties and provide affordable mortgages to those with more modest deposits, including first time buyers”.
Chief executive at Taylor Wimpey, Pete Redfern, said the NewBuy Guarantee will: “go a long way in helping a wide range of buyers who have had to put their dreams of getting on or moving up the property ladder on hold”.
Bovis Homes chief executive David Ritchie agreed, saying the need for aspiring homeowners to get much larger deposits together had: “undoubtedly been a significant factor in slowing down the market”.
“We want to hit the ground running with NewBuy and there is a real level of commitment among housebuilders, lenders and Government to make it work for the country’s homebuyers,” he said.
Cautious: Jon Neale, residential research director at Jones Lang LaSalle said, “The NewBuy Guarantee scheme is very welcome news for the house building industry. With only a little over 100,000 new homes constructed in England over each of the past few years, we are building at the lowest rate since the Second World War.”
“Our own research suggests that many house builders believe that the NewBuy Guarantee will be instrumental in reviving the industry.”
“On the other hand, there are reasons to be cautious. Firstly, most major house builders continue to indicate that they intend to grow their business by increasing margins rather than volumes, so there is unlikely to be a surge in build levels, irrespective of the success of this scheme. Many developers have moved towards developing larger family-sized houses on sites recently acquired, and that remains their business plan and the basis for the high levels of profit reported recently.
“They have been left with more peripheral sites in urban locations, often with planning consent for flats, purchased before the housing downturn. These are not viable in the current climate, and there could be concerns if NewBuy Guarantee is solely used for such sites, particularly if there are no longer-term plan to expand land acquisition and development activity.”
“However, the interest rates on offer, at circa five per cent in the majority of cases, are still higher than the wider market. According to the Bank of England, the typical rate for a two-year fixed mortgage at 75 per cent loan-to-value was 3.24 per cent in December. This compares with 4.29 per cent to 5.69 per cent for a two-year package under HomeBuy.”
“Thirdly, it remains to be seen how selective lenders will be in selecting customers. If they are very conservative on the multiples of income they will lend against, or credit history or employment status, the scheme may not be as much a success as the industry hopes.”
Cautious: Grenville Turner, Chief Executive of Countrywide, the UK’s largest property services Group, said: “We strongly support the NewBuy mortgage indemnity scheme and believe it is a huge break-through for the new build sector. Most importantly, we believe that NewBuy addresses the biggest issue affecting house transactions – deposit affordability.
NewBuy is not exclusive to first time buyers – the £500,000 threshold for eligibility is generous and will help a number of first time buyers and homeowners wanting to trade up. Homeowners trapped by rising standard variable rates now have an alternative method to fund their move. That said; we’ve yet to see how many of the lenders signed up to NewBuy will support part exchange, which plays a crucial role in today’s market, generating up to 50 per cent of new build sales on some sites.
“In addition, we would like to stress on behalf of all homeowners that NewBuy is not a ‘sticking plaster’ to replace the void in house sales that will be left by the Stamp Duty Land Tax holiday. NewBuy is restricted to new build sales only, which made up approximately five per cent of all mortgage lending last year. Lenders estimate that the Stamp Duty Land Tax holiday assisted up to 170,000 property sales and stimulated hundreds of thousands of house price purchase chains, while NewBuy is limited to new build sales only, which have no onward chain.
While we are supportive of NewBuy as a vital tool to kick-start the new build market, NewBuy lacks any funding/provision to assist homeowners with limited equity trying to sell, which we hope the Government will address in the Budget.”
Questioning: Robin King, director, Move with Us, questions why the NewBuy Guarantee scheme introduced by the government today only stretches to those buying new build properties: “Any help for the housing market is a good thing; however, historically new homes have accounted for less than 15 per cent of the whole market and have no established value so why are we just supporting new homes?
“It’s good news for the construction industry, but what will happen to the surplus of old stock that we already have on the market?
“If the Government wants to make a real difference to the property market, this scheme should be extended out to all home purchases. The vendor could pay the 3.5 per cent which is currently paid by the new home builder, into an account made available to the mortgage lender.
“To some extent the scheme will help the market, but we really need more detail now about the eligibility criteria for these 95 per cent loans and wonder if this scheme will actually be wide enough for the Government to reach its target of helping 100,000 families and young people move into homeownership?”
Supportive: John Cridland, CBI Director-General, said: “Unfreezing the housing market will be a major game-changer in the drive for economic growth, which is why we called on the Government to support home buyers by making it possible for them to take out low-deposit mortgages. Spring is traditionally a great time for house-buying, and I hope it won’t be too long before home buyers benefit from the NewBuy scheme.”
Scathing: Jonathan Samuels, CEO, Dragonfly Property Finance said: “The Government’s NewBuy guarantee scheme, like many such schemes over the years, smacks of desperation. The property market will come back when it is ready to come back and schemes like this are mere tinkering around the edges.
“If the Government thinks this scheme will kickstart the property market then it is in Cloud Cuckoo Land.
If the Government thinks that this scheme will kickstart the market, well then it is living in Cloud Cuckoo land.’ Jonathan Samuels, Dragonfly
“The concern is that NewBuy is intrinsically leveraged, and we know where leveraging got us in the past.
“People should buy when they are genuinely in a robust position to do so, not because a bank says they can buy.
“We all want to see more people owning their own homes but the values of conservatism should not be superimposed on the forces of the market.
Lukewarm: Matt Hutchinson, director, flat and house share website Spareroom.co.uk, said: “Any government assistance will be welcomed, but you do feel that this is simply scratching the surface of the problem, and until lenders across the board relax their lending criteria, it is going to continue to be an uphill struggle for first time buyers.”
Disappointed: Kevin Hollinrake, MD, Hunters, said: “The scheme will help many first time buyers which is excellent news. However, it is disappointing that this new scheme, as with similar initiatives, is only aimed at new homes, rather than the remaining 90 per cent of people who want to sell or buy a home in the resale market.
“The Government has rightly identified that the deposit is the biggest barrier to entry to the housing market yet at the same time they are re-introducing stamp duty on properties between £125,000 and 250,000. The Government is giving with one hand and taking away with the other.”
Cynical: Jo Eccles, Director, Sourcing Property said: “New attempt to delay the bubble bursting in my opinion. No negative equity mention?”
Cynical: Henry Pryor, commentator: “Anyone spotted that all those vocally supporting NewBuy scheme either build, sell or fund houses? Are you thinking what I’m thinking…?”
Hopeful: Jordans Home Rentals: “Let’s hope this gets the market moving.”
Cautious: Melanie Bien, Bien Media: “So three lenders – Barclays, Nationwide, and NatWest – are offering NewBuy mortgages… we could do with a few more joining the party.”
Supportive: James Poynor, MD, Countrywide Land & New Homes: “I firmly believe that launching NewBuy is a game changer for the industry and will get Britain moving again. It could be radical in terms of its potential impact on the new build market in 2012 and beyond”.