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NewBuy cuts the risk of mortgages...for lenders: Cash guarantee to ease homes crisis is branded a 'bung' for big housebuilders

Published 19th Mar 2012

Housing Minister Grant Shapps joined David Cameron last week to announce what was billed as the Government’s big housing initiative – the NewBuy scheme.

This aims to offer mortgages of up to 95 per cent of a property’s value, meaning buyers with deposits of just five per cent can buy a home.

Cameron said: ‘We have lenders who are not lending, so builders cannot build, so the buyers cannot buy – and it needs the Government to step in and help unblock the market.’

With increasing numbers of would-be buyers trapped in accommodation where monthly rent often far exceeds the cost of a mortgage, many agree there is an urgent need for action. But is the NewBuy scheme the answer?


How does NewBuy work?

After the credit crunch, lenders withdrew most mortgages where borrowers had less than a 15 per cent deposit. Where such mortgages remained, interest rates were painful.

With house prices stubbornly high, this meant new buyers suddenly had to find far bigger deposits – up to £40,000 in Britain’s costlier regions, such as the South-East.


'WE WOULDN'T HAVE OUR HOME WITHOUT THIS PLAN'

Plumber Derek Scott and his wife, Sally, moved into their three-bedroom semi a month ago thanks to a scheme offered by Lloyds Banking Group in association with local councils across Britain.

With this scheme the councils contribute to an account at Lloyds, effectively topping up buyers’ five per cent deposits to 25 per cent. This enables first-timers such as the Scotts to qualify for the lower rates usually associated with far bigger deposits.

Derek and Sally put £3,450 toward their £69,000 home in Widdrington, near Morpeth, with Northumberland County Council effectively ‘contributing’ a further £13,800.
Lloyds offered a mortgage fixed at 4.34 per cent for three years, giving the couple a monthly pay rate of £380. ‘This is far less than the rent on a similar property,’ says Sally, a nursery nurse. ‘We’re planning a family and we need the security of our own home. We simply couldn’t have done it without a scheme like this.’

This is not shared equity. The Scotts own the property in its entirety. After five years, the local authority withdraws its money, on which interest has been earned, and the Scotts will hopefully have built up enough equity to qualify for other, mainstream mortgage deals.

The scheme launched a year ago and 12 local authorities have signed up. It is based on Lloyds’ wider Lend-a-Hand scheme where borrowers can benefit from parents’ or other family members’ contributions toward a deposit.

One advantage of the scheme is that it includes older properties, which is helpful for those who are wary of new builds.

NewBuy tries to solve this problem. Housebuilders and the Government have contributed to a fund that will protect lenders from losses if borrowers fail to meet their repayments and properties are sold at a loss.
NewBuy will allow lenders to claim up to nine per cent of a property’s value if this happens. In return for this reduced risk, participating lenders are offering lower rates to borrowers.


Will I qualify and what properties can I buy?

Borrowers can buy in single or joint names and it can be their first home or a move up the ladder. Borrowers will need a deposit of between five and ten per cent. The property must be a newly built house or flat priced under £500,000 and marketed by participating builders.

So far these include Taylor Wimpey, Linden, Redrow, Persimmon, Bovis, Barratt, Crest Nicholson and Bellway.

Who is lending and how much will the mortgages cost?

Nationwide Building Society, Barclays and NatWest Home Loans have so far released mortgage details under the NewBuy tag. Halifax and Santander have said they will offer loans shortly. Only fixed rates are available over a range of years.

NatWest’s deals are at 4.29 per cent (two years) or 4.99 per cent (five years) with fees of £499. Barclays’ are dearer at 4.99 per cent (two years) and 5.89 per cent (four years), also with a £499 fee. Nationwide offers a three-year rate of 5.69 per cent and a five-year at 5.99 per cent, both with a £999 fee.

Fees can be added to loans in all cases. Lenders will undertake their normal credit and income checks and early redemption penalties are likely to apply for the length of the fixed rates. Once the fixed terms are over, borrowers revert to lenders’ standard variable rates. The hope is that they will then have enough equity to qualify for other, mainstream mortgages if they wish to switch.


What are the risks?

Although NewBuy cuts the risks for lenders it doesn’t reduce them for borrowers. If your home is repossessed and sold at a loss you will be liable for any shortfall between the sale price and the mortgage. In other words, it will not make any difference that your lender has claimed losses from the NewBuy ‘emergency buffer’.

The other major risk is that all newly built property is difficult to value and there is a possibility of overpaying. Where a deposit is merely five per cent, this leads to a greater risk of negative equity.

Lenders say they have learnt from the years before the financial crisis when some developers sought to inflate or disguise the real values of their homes with a range of complex incentives such as cashbacks, rental guarantees or furnishings. Lenders say they will seek accurate valuations and be alert to possible ‘price distortions’. Some critics have already branded NewBuy as a ‘taxpayer-funded bung for big housebuilders’.

Others are more moderate, but still urge caution. Matt Griffith of lobby group pricedout.org.uk, which represents those who cannot afford to buy, says: ‘NewBuy is not the greatest scheme. I would not be surprised to see considerable numbers of purchasers in negative equity come the next election.’

Mortgage expert David Hollingworth of broker London & Country in Bath, Somerset, says: ‘NewBuy does improve the availability of mortgages for those with small deposits, but borrowers need to remember that the smaller their deposit, the higher the risk of negative equity.’

Source: ' ThisIsMoney '

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