Readers of housing market blogs and forums cannot fail to have seen a huge online reaction to an initiative announced in January. Was it housing minister Grant Shapps’ latest idea? No. Perhaps concern over rising complaints to the Property Ombudsman? No again. Instead, the massive response was to a new mortgage scheme announced by Barratt Homes. Under the proposal, launched with Hitachi Capital, parents of grown-up children who want to buy a first home in Barratt’s Northampton region will be able to get an unsecured loan of up to £50,000.
Barratt chief executive Mark Clare describes it as “low risk”.
To those who see it as an innovative bid to kickstart the market, the scheme is a way for parents to help without remortgaging or putting a second charge on their own home.
To those who oppose the scheme, it is an irresponsible way to get a 95% mortgage by the back door, and to endorse high asking prices for new-build homes artificially.
Catching on
Although the idea made waves when announced – partly because it involves Hitachi Capital, never before a residential lender – the idea of securing loans from unlikely sources is catching on among builders and agents desperate to shift stock.
Barratt’s Midlands region is discussing a deal with a housing association which would involve privately sourced loans to would-be buyers. These would be on terms different from the generally unpopular shared equity arrangements which have been the only way to make up the deposit shortfall until now.
Meanwhile, Liverpool estate agency Andrew Louis is urging private vendors selling homes suitable for first-time buyers to lend their purchasers 5% of the asking price. If the buyers can then muster another 5%, they may be in a position to secure a 90% mortgage.
Connells – Britain’s second largest agency, which has 480 offices serving the market’s lower end – is offering first-time buyers “groundbreaking” own-brand 90% and 95% mortgages.
“I can’t think of anything more important than helping customers secure their first home,” says Connells’ Ross Bowen. “First-time buyers are the lifeblood of the market and, with transactions at less than half the level seen in 2007, I hope we’ll see more initiatives like this.”
Foolishness?
So, is all this just remarkable ingenuity to revive the market, not so far removed from the HomeBuy Direct measures introduced in the Budget? Or foolishness of the highest order, returning to the unreasonable levels of credit that many blame for the downturn?
Housing pundit and BBC Breakfast market commentator Henry Pryor says that, far from being a market-led response to the current mortgage shortage, the Barratt/Hitachi scheme distorts the housing economy.
“The answer for homes not selling in the current market is to reduce their price – not create artificial and bizarre sources of lending so buyers can cobble together a package to allow them to pay an inflated price,” he argues.
Many agree: online responses on politically divergent websites such as those of The Guardian and The Daily Telegraph were overwhelmingly against the Barratt/Hitachi link, for example.
But most mortgage experts – even those not involved in the spate of new schemes – believe that they are good value and not inherently dangerous.
“Of course, people need to avoid overborrowing,” says Ray Boulger of independent broker John Charcol, “but the consistent problem with most would-be purchasers is not the mortgage repayments, even anticipating interest rate rises. The issue is their inability to muster a large deposit. Many of these top-up schemes offer a way round that problem.”
Boulger argues that the few 90% mortgages now offered by traditional lenders are very expensive. If a buyer instead takes out a relatively cheap 75% mortgage, topping it up with other loans, the “blended” cost may be less than going down an orthodox single-loan route.
Other mortgage commentators have been supportive, too. David Hollingworth of London & Country, for example, has described the Barratt/Hitachi loan as having “a surprisingly good rate”, although he reminds parents taking it up to avoid overstretching themselves.
Whatever the concerns of some observers, it looks as if there will be more of these schemes in the near future, as the traditional mortgage market remains constipated.
Hitachi’s deal, for example – currently exclusive to Barratt – is likely to be rolled out to other developers across the UK this year, according to Ray Boulger.
In addition, investment company Assetz will also offer borrowers a top-up loan – again, possibly linked to buying a new home from a developer – to the limit of 90% of a home’s value. This would allow a purchaser with their own 10% deposit to take up an Assetz 15% loan, which would allow them to go on to arrange a 75% mortgage – which would have a far cheaper rate than a single 90% mortgage secured at the outset.
Desperate or just good sense? The jury is out.
Why developers and agents are desperate
Older, more affluent housebuyers who have substantial equity already may not even know that there is a mortgage crisis – those buying top-end homes can borrow almost exactly the same amount today as in 2007, according to research by surveying website e.surv.
“Since Q2 2007, just before the credit crunch began, the volume of mortgages offered to those buying homes valued between £500,000 and £750,000 has fallen 22%, while those over £750,000 have fallen merely 2%,” it says.
But the volume of mortgages offered to those buying homes under £125,000 – almost exclusively first-timers – has fallen by a whopping 71%.
Councils get in on the act
It is not just housebuilders and estate agents that are worried about first-time buyers unable to get on the ladder; now local authorities are joining in.
Blackpool, Warrington, Northumberland, Newcastle-under-Lyme and East Lothian councils have launched a scheme aimed at first-time buyers who can afford monthly repayments on a 95% mortgage but cannot raise the typical 25% deposit required by most lenders. A further 10 local authorities are believed to be on the verge of proposing similar deals.
The scheme – set up by Lloyds TSB and Capita’s Sector Treasury Services, a consultancy with a history of working with councils – would provide 20% to add to a buyer’s 5%, thus permitting the purchase to go ahead. If a house’s value falls below its purchase price and is repossessed, part or all of the shortfall will be recouped by Lloyds from the council.
Lloyds’ Stephen Noakes says the scheme, called Local Lend a Hand, “addresses the real challenges first-time buyers face”. But, with cuts looming, its wisdom has been questioned.
Drew Wotherspoon of mortgage broker John Charcol says the scheme “looks a little odd” in the current climate – not because it is interfering in the market per se, but because it risks public money.
He says: “If house prices fall over the coming years, it seems the taxpayer will be out of pocket. That will be unpopular, to say the very least.”
