CUK Exclusive Interview: IFA on Help to Buy for contractors
As contractors in the IT sector often recognise, the better projects and initiatives come in phases rather than big bang adoptions or launches. It is therefore with some cautious optimism that such skilled and independent workers can approach Help to Buy – Phase Two, the Mortgage Guarantee Scheme, explains ContractorMoney, an IFA to contractors.
Fast-tracked by the government by three months, this second phase of the scheme allows contractors to immediately access 95% mortgages this week, although the state won’t start offering the guarantees until January, as originally intended (but contractors can still complete before January).
It follows on from the success of Help to Buy – Phase One, rolled out in April, which sees the government offer would-be property buyers, including contractors, a 20% loan to purchase a new-build property.
Given all this movement in the mortgage market; in light of critics claiming Help to Buy could lead to another housing bubble and with uncertainty yesterday from the Bank of England over the scheme’s likely impact, ContractorUK approached independent financial adviser Tony Harris, founder of ContractorMoney, to discover how contractors can use the Mortgage Guarantee for their own ends.
What is the Mortgage Guarantee Scheme?
The Mortgage Guarantee scheme is currently available on purchases of any property under £600,000. Encouraging up to £130bn of funding, the Mortgage Guarantee will be available for three years and aims to offer mortgages to buyers struggling to come up with a large enough deposit to enable their house purchase.
Working in a similar way to the ‘indemnity’ policies of old, the government’s Mortgage Guarantee will help reassure lenders that your purchase represents a sound risk, subject to the usual credit checks on you. If the worst should happen and they need to repossess and sell at a loss, the lender can rest assured that in addition to your deposit covering part of the loss, the government’s insurance will help absorb all or a substantial part of any remaining capital loss.
As the lender is protected under the Mortgage Guarantee, the rates that they offer on high loan to value (LTV) mortgages should be far lower than those currently available, so homeownership will be more affordable for thousands of contractors with low deposits
How does the Mortgage Guarantee scheme work, precisely?
When you apply for a mortgage that is covered by the Mortgage Guarantee Scheme, you will put down a deposit of between 5% and 20% and the lender will carry out all of the usual affordability checks.
Essentially, the Mortgage Guarantee scheme allows you to take out a standard mortgage at a loan to value of between 80% and 95%. Unlike the Help to buy Equity Loan scheme, which is already available to contractors who are purchasing a newly built home, under the new Mortgage Guarantee Scheme the government won’t loan you any money upfront, the guarantee is only in place to protect the lender if you default on your mortgage. All of the arrangements happen behind the scenes as the lender will apply for the Mortgage Guarantee and will cover any fees that the government charges to use this facility. This saves you, the contractor eyeing a property, the hassle of repaying a government loan after twenty five years of homeownership, as you would do with the Equity Loan scheme (Help to Buy- Phase One). You will simply need to cover your mortgage repayments.
What about contractors who want to remortgage?
Yes, the Mortgage Guarantee scheme will also be available on remortgages. As a result, contractors who have been waiting on a lender’s Standard Variable Rate (SVR) because they don’t have enough equity in the property to remortgage to a competitive rate could save hundreds of pounds a month, by switching to a lower rate on the scheme.
Which lenders are offering the Mortgage Guarantee Scheme?
Currently, Lloyds Banking Group and Royal Bank of Scotland, which owns NatWest, are signed up to the scheme, so contractor-friendly lender Halifax (which is owned by Lloyds) will be involved from the outset ,which means that you will be able to apply for a 95% mortgage using your gross annualised contract rate alone. In theory, any application over 80% LTV will automatically be processed under the Mortgage Guarantee scheme as it will help minimise the risk to them if a borrower defaults and will encourage them to increase lending at higher loan to values.
It is worth pointing out that there has been some confusion surrounding when you, a contractor, would be able to complete on a Help to Buy purchase, seeming to arise because the government brought forward the Mortgage Guarantee scheme’s introduction by three months. However, contrary to what the mainstream press has been reporting this week, if you are buying a home under the Help to Buy scheme you will be able to complete before January and so you could be in your new home before the New Year!
Why have concerns about the impact of Help to Buy, phase one and two, on the housing market been raised, and how far do you agree with these concerns?
There has indeed been widespread speculation in the national press about the impact that Help to Buy will have on the mortgage market and the economy as a whole, with fears surrounding the impact of the scheme on house prices and the ability of future generations to get on the ladder. I would say that while it is inevitable that house prices will rise as a result of the increased demand in the market, the Help to Buy scheme is specifically designed to help people purchase their primary residence so property investors and those who intend to keep their existing property as a “let to buy” will still have to find a larger deposit, which should help to limit the impact.
Plus, remember that the Bank of England’s Financial Policy Committee (FPC) will be monitoring the scheme to ensure that the increased lending doesn’t lead us in to another housing bubble. The FPC will also reduce or extend the scheme if needed over the next three years, but my own view is that talk of a housing bubble is a very London-centric issue, mainly because the £600k limit will prove a natural cap in many central postcodes.
That said, Help to Buy may impact on buy-to-let, as more first time buyers will be able to shun the rental market in favour of stepping onto the housing ladder, thanks to the lower deposits required. This may mean that demand slips in the rental market and may also have an impact on the availability of typical buy-to-let properties because first-time buyers will be competing with potential landlords to snap up ‘starter’ homes.
Looking outside of the housing market to the wider economy, the positive impact of Help to Buy on the construction industry, as well as employment, and the long term benefits of people owning their own home, far outweigh the possible adverse impact of rising house prices. I also believe that given the pressures of our ageing population and the problems that will inevitably arise in the future from the inadequate state pension provisions, the equity that will be held in these homes bought under the scheme can help to contribute to retirement incomes, long term care costs or inheritance for future generations.
Where will Help to Buy sit on the scale of government initiatives in the eyes of most contractors in, say, a few years from now?
Help to Buy offers contractors that are struggling to save a large deposit the opportunity to get on to - or move up - the housing ladder with just a 5% deposit. It’s worth bearing in mind CML (Council of Mortgage Lenders) figures. They show that the average first-timer in the property market currently – without the scheme - faces a typical deposit of 18%. So that would mean saving up almost £30,000 to secure the average UK property, which comes in at £165,000. The council has pointed out that, before Help to Buy, only about 40% of first-timers can buy their desired bricks and mortar without financial assistance from another party.
Also, as I mentioned before, the scheme should significantly boost the construction industry – and its labour figures – which contractors in the sector, and even in its bedfellow sectors, will welcome. And yes, while there are some concerns over the short and medium-term impacts of Help to Buy, to my mind it is more important to focus on the long term advantages that can be delivered, to individuals and society at large, from more people owning their own property. Meanwhile, just look at the comparable costs of renting versus purchasing on the Help to Buy scheme. The long term savings are clear to see - as your monthly mortgage repayments will include interest and capital, which will ultimately lead to contractors owning their own home rather than lining the pockets of a landlord.