Help to Buy mortgages set to be 30% more expensive than renting
I have already written about my concerns about the cost of Help to Buy and whether it will actually work out as cost effective, especially for first time buyers. But now I am able to add some substance to what was initially just a hunch.
One of the ideas behind phase two, which was brought forward by three months, is that people who are currently renting will be able to get on the property ladder. Many of them are likely to be first time buyers who have had difficulty getting the necessary deposit so in theory a 95% mortgage via the Help to Buy scheme should suit them.
However research by Hometrack, specialists in collecting, analysing interpreting housing market data, shows that the monthly cost of a 95% Help to Buy mortgage is up to 30% higher than renting.
Director of research Richard Donnell has concluded that the pricing of Help to Buy mortgages means the scheme will appeal to those on the highest incomes, limiting the scale of potential demand. He also believes, like many other commentators, that demand for housing will rise in the short term putting pressure on prices and that the current focus on Help to Buy has largely masked what is a housing market recovery borne from improving consumer confidence and record low mortgage rates.
Now that the important details on the pricing of mortgages under the indemnity part of the Help to Buy scheme are available analysts can now assess the attraction of the scheme to would be buyers.
The majority of first time buyers are renters. While household incomes have flat lined in the last four years, rents have risen steadily. According to Hometrack, on a national basis the monthly cost of renting a two bed property is 18% more than the cost of buying with an 80% loan to value mortgage, the current average for a first time buyer. The inability to raise a 20% deposit without the aid of external parties, such as family, is a key barrier to accessing home ownership.
The greatest attraction of the second part of the Help to Buy scheme is the ability to buy a property with a much smaller deposit. For the average two bed home nationally the required deposit will drop from around 20% or £27,000 currently to 5% or £7,500.
However, Donnell points out that what has attracted less focus, and has a much greater bearing on the take up of these mortgages, is the monthly cost of buying with a 95% mortgage at a 5% to 5.5% mortgage rate. In particular, how this compares to the cost of renting a similar sized property.
The Hometrack analysis suggests that buying a two bed home with a 95% Help to Buy mortgage would cost 22% more per month than renting on a national basis. The increase is 31% in higher value markets such as London. Indeed, across all regions Help to Buy is also around 5% higher than rental values at the top 25% of the market.
So, if the current pricing of Help to Buy mortgages means the scheme is likely to appeal to those first time buyers on the highest incomes this is likely to limit actual levels of take up under the scheme.
Donnell also points out that while lenders may sign up to the scheme overall lending at 90% to 95% LTV accounted for just 1.8% of all mortgages in the last 12 months and the appetite of lenders to grow lending volumes at this end of the market is another important consideration even with the availability of the mortgage guarantee.
In the near term the publicity and awareness around the scheme will appeal to a sizable group of would be buyers but how much of this demand translates into actual Help to Buy sales remains to be seen.
The reality is that a small but growing proportion of would be buyers are already starting to benefit from greater competition between lenders at up to 90% LTV. A standard 90% LTV mortgage at 4% mortgage rate would require a £15,000 deposit but the monthly costs would be less than 10% higher than renting.
Basically, home buyers who can raise a deposit have more housing buying power now than at any time previously. This is where the real potential exists to drive demand and push house prices. Donnell concludes that the publicity around Help to Buy is likely to be doing more to stimulate the housing market than the direct impact of the product itself.
Article courtesy of Ray Clancy, Editor Property Wire