Last week the Prime Minister announced the launch of a new government housing strategy aimed at getting the housing market moving again, laying the foundations for a more responsive, effective and stable housing market in the future, giving tenants a range of quality properties to chose from, and to improve environmental standards and design quality. While the aims of the scheme are lofty and certainly sound good, can any of these strategies actually help you?
If you are so inclined, you could read the whole of the Coalition government's housing strategy document by clicking the link. However the main elements of the scheme include:
- a mortgage guarantee scheme to encourage lenders to offer 95% mortgages to buyers of new homes (like the new 1 and 2 bedroom apartments Northfields currently has for sale in Northfield Avenue, Ealing, pictured above)
- an increase in the subsidy available to developers under the "Affordable Homes Programme".
- a change to the rules so that the money from the sale of council houses will go towards the building of new council homes.
- increased subsidies for councils that take over neglected homes which have been left empty for a long time.
How Might This Strategy Help You?
For those people who would like to purchase a new home but have found it difficult to secure a mortgage, the new mortgage guarantee scheme will be the most appealing part of the new strategy. The aim of this part of the scheme is to guarantee lenders against their losses if certain borrowers fail to repay their loans. The goal of the scheme is encourage lenders to offer up to 100,000 potential buyers of newly-built properties mortgages even if they only have a 5% deposit, and not the 20% deposit that many lenders are currently requiring.
With many lenders fearing that house prices may fall, large deposits are required to secure a mortgage, thereby, insulating the lender against any potential losses if the market does suffer.
Essentially, mortgage lenders are protecting their interests if the borrower was unable to pay their mortgage, leading to the property being repossessed and then sold on for less than the value of the mortgage.
Lenders are also required to put aside a much larger financial cushion in their reserves if they lend with a small deposit rather than a large one as required by international banking rules.
So both of these elements mean that lenders are not approving mortgages for people with small deposits.
How the 95% Mortgage Scheme Would Work
An article on the BBC offered a great example of how the scheme would work:
"Let's suppose you want to buy a newly built flat selling for £100,000 but can only put down a £5,000 deposit.
At the moment your chances of being offered a 95% mortgage for the rest are non-existent.
Under the new scheme, if the developer, lender and you all agree, you may now be offered the 95% loan you desire.
That is because on top of your deposit, which will absorb the first £5,000 of any fall in the value of your home in the event you cannot repay the loan, the lender now has further comfort.
If the price of the property falls below £95,000, the lender will be able to reclaim 95% of any losses it incurs."
At the moment The Council of Mortgage Lenders (CML) says that the exact details of how the scheme will work are stilling being finalised. However, in essence, the new house builder will contribute 3.5% of the selling price of the home to the lender, which will be held for seven years. During the 7 years that their funds are held by the lender, the builder will accrue interest on their 3.5%.
The government will also provide money to add to the lenders financial cushion to the tune of a further 5.5% of the sale price. Between the builder and the government the lender will be holding 9% of the sale price of the property as a contingency fund against any potential losses.
The scheme will ensure that the lender will have insurance for 95% of its loss if the borrower defaults.
Who Can Benefit From the Scheme?
- buyers who want to purchase a newly built home and would like some help
- lenders who choose to participate
- property builders and developpers who choose to participate
If you do not want to participate in the scheme you don't have to, but conversely you will not automatically be granted the benefits from the scheme.
Is There A Time Frame or Limit on this Scheme?
The short answer is "We don't know". No limits on the scheme have been stated by the government, so we don't know how much money will be available, nor how many people might be able to take advantage of the scheme.
We do know that currently the scheme applies only to England, but similar models are being considered for the rest of Britain.
Does This Scheme Put an End to Negative Equity Worries?
No. If a buyer misses their mortgage payments and defaults and then sells their home to pay the mortgage in full, they will still be liable if the subsequent sale price of their home is less than what they borrowed to purchase the house. If you are not sure exactly what negative equity means, click the link to find out.
So under this new scheme, if you defaulted on your mortgage, the lender could recoup 95% of its own loss, then chase you for the loss too.
If you had any money that the lender could then claim, they would use the funds recouped from you to repay the insurance payment they held from the scheme.
In other words, the scheme does not protect the buyer against the loss of their home, it protects the lender from loss of the money it lent to you. As the buyer, you indirectly benefit because the lender being insured against loss allows them to loan money to you that you otherwise never have been able to obtain to purchase your home.
Essentially, the scheme greases the wheel of the mortgage lending processes freeing up funds for buyers to access.
If you do want to be insured against defaulting on your mortgage payments you will need to arrange for your own mortgage payment protection policy. For advice on how such a scheme works, speak to an independent mortgage broker who can find the right type of cover for you. Call Northfields on 0208 840 6666 or e-mail us at [email protected] and we can refer you to an independent broker who can advise you on how to protect yourself.
If you are interested in taking advantage of the scheme, you'll need to start looking for newly built homes. Why not start by looking at these gorgeous 1and 2 bedroom luxury apartments for sale in Northfield Road in Ealing.
Or browse the properties Northfields currently has available for sale by clicking the link.