In March 2012 the government launched the NewBuy scheme which aims to kickstart the housing market by making 90-95% mortgages available to potential buyers on newly built properties up to a maximum value of £500,000. A mere 6 weeks on, the scheme has already attracted plenty of controversy and criticism. Here we take a look at the scheme and its potential pitfalls.
Essentially NewBuy aims to make obtaining a mortgage and buying a house more accessible to those who would struggle to raise the large deposits currently being favoured by mortgage lenders. The government will act in partnership with participating house builders to underwrite the mortgages thereby giving lenders some protection against the potential losses which can be associated with such high loan-to-value loans. However, only a limited amount of potential loss would actually be covered (providing a buffer of roughly 14%).
NewBuy is open to first time buyers or movers in England providing that they are UK citizens, that the home will be a fully owner occupied primary home and that the mortgage is a capital repayment loan and they have not had assistance from any local or public authority to raise their deposit. The scheme is available only on new build properties built by participating builders. At present these include Persimmon, Bovis Homes, Redrow, Taylor Wimpey, Barratt Homes and Bellway amongst others. Buyers are subject to all the usual mortgage application procedures and have exactly the same responsibilities to keep up their mortgage repayments as for a normal house purchase.
NewBuy mortgage products
Currently only Barclays, Halifax, NatWest and Nationwide are offering NewBuy mortgage products, with Santander expected to launch products later in the year. The availability of mortgage products is actually diminished further as each lender is only dealing with a specific selection of builders. Nationwide is dealing with the greatest number at 13, while Barclays is dealing with only 6. There is also variation between lenders as to how the products are being made available, with most restricting product release to their own advisors and a small number of intermediaries. This means that having found their potential home, buyers will have to go with whichever lender or lenders their builder is working with, and can receive advice from only a limited number of sources.
There has been widespread criticism that these NewBuy products offered by lenders are simply too expensive. Interest rates are being offered at around the 6% mark, ranging from 4.99% for a 2 year fixed deal with Barclays with a £499 fee, to 6.39% for a 2 year fixed deal with Halifax with no fee. NatWest have raised their interest rates by 0.7% since the launch of the scheme. Some accuse lenders of undermining the scheme by charging high rates, while some see the higher interest rates being offered as evidence that mortgage lenders are not actually that keen for buyers to sign up for these riskier loans in the first place.
high loan-to-value mortgages
Critics have declared that the scheme favours no one but the house building industry. Enticing buyers with risky high loan-to-value mortgages with high interest rates to buy newly built homes which would be expected to suffer some degree of depreciation in the first few years is being seen by many as foolish if not irresponsible. Even the Council of Mortgage Lenders is exhibiting a reluctance to overly endorse the scheme. Its consumer information guide covering NewBuy specifically warns potential buyers about the risk of negative equity with these loans and suggests considering signing up for the scheme only if you are unlikely to want to move house again in the near future!
Other critics suggest that the scheme shows a great lack of foresight by the government and that artificially inflating new build house prices by offering these incentives is partly what got the housing market into this mess in the first place. Coupled with plans to flood the new build market by building a large number of homes over the next few years, buyers using this scheme may be left feeling extremely vulnerable financially.
Certainly potential buyers must be very aware of the potential risks here and make sure that they are not the ones losing out. While there is no doubt that this will genuinely help some to successfully get onto the property ladder for others it may be wiser to heed the advice that ‘If it sounds too good to be true, it probably is!’.