New builds but not old news
Craig McKinlay (pictured), new business director, Kensington Mortgages
Without the development of new builds, the housing market would collapse.
First-time buyers are hungry for homeowning and appetite is still resilient even amongst the UK’s volatile political landscape.
Little do we know what’s in store for 2020 but one thing is certain; the new build sector remains integral to future house market growth.
New build moves largely in tandem with the government’s Help to Buy mortgage scheme.
First introduced in 2013, this initiative has helped thousands step onto the property ladder – much earlier than they could have done before – allowing buyers to borrow loans from the government of up to 20% of the property’s value, or 40% in London.
Put into perspective, over 200,000 properties have been bought with Help to Buy since its birth, of which 81% of total purchases were made by first-time buyers.
The current equity loan scheme tapers down significantly early next year, before stopping completely in 2023.
Once this draws to a close, there is no official alternative or a concrete plan in place.
We should remember that Help to Buy was only meant as a short-term boost, so it’s up to the industry to come up with a resolution; and there needs to be some viable alternatives.
- Shared Ownership
Help to Buy signs are synonymous with new build advertising and marketing.
What is less used, and less well known, is Shared Ownership – although it’s been around for decades since the 1970s.
Unlike Help to Buy though, Shared Ownership is here to stay.
The scheme allows individuals to buy a stake in the property’s value that they can afford, while paying rent on the remainder owned by the housing association.
Depending on the client circumstances, brokers should consider promoting this scheme and highlighting the benefits of ‘staircasing’, allowing borrowers to buy a greater equity share once they can afford to.
For example, after a pay rise.
Affordability is typically better on Shared Ownership than standard lending so an expansion of this scheme to the mass new build market could be a very good alternative to Help to Buy.
- ‘Private’ Help to Buy
Over the past few years, lenders have begun slowly lending back into the 90% and 95% LTV territory.
Currently, according to Moneyfacts, there are nearly 300 products on market at 95% LTV.
In comparison, there are over 1000 products at 85% LTV.
However, very few lenders will lend to new build at 95 LTV.
While some lenders are wary of the risk involved by lending a significant portion of the property’s value – these attitudes will need to change once Help to Buy ends and lenders are left to sort the difference.
There have already been some tentative steps into private shared equity second charge lending, but these will need to be far more widely available to make an impact.
- High LTV Lending
Due to the supposed new build premium most lenders are reluctant to lend at 95% LTV on new build, but schemes such as Mortgage Indemnity Guarantee are designed to manage that risk.
A mortgage indemnity guarantee protects the mortgage lender, particularly when a repayment default occurs.
The service also reduces the lender’s total losses if this situation was to happen.
There are a number of these services available in the market, which aims to mitigate lender risk by reducing the total LTV.
More providers will likely enter this market to accommodate the increasing demand for 95% LTVs.
With the ending of Help to Buy, the number of 5% deposits being handed over to lenders will increase and without an MIG, lenders would not provide mortgages at high LTVs.
In short, MIGs keep the market open to first-time buyers with a small deposit.
- More flexible affordability criteria
Lastly, it’s not just products that need to be changed.
It’s attitudes and regulation too.
The industry needs to consider how changing macro conditions, like inflation and rising house prices, are affecting would be homeowners from passing stress tests.
Many individuals struggle to take out a mortgage because they fail to meet the 3% stress testing rule, with most arguing that if they can afford their higher rental payments, they should be able to afford a cheaper mortgage.
As we all know though, getting a mortgage is more complex than merely what you can afford.
However, the industry needs to consider how these tests will affect those even more after Help to Buy ends.
If there was a solution for affordability criteria to be more flexible, it would require less time for individuals to save for a deposit.
Ultimately, Help to Buy was never the be all and end all.
The scheme has had its fair share of scrutiny over the years.
And its separation from new build has the potential for some very positive changes.
Now more than ever, lenders, developers, providers and potential buyers will need to seek alternative solutions.
As time ticks by, regulators may need to re-examine and begin initiating conversations sooner rather than later on how first-time buyers will still be able to step onto the house ladder.
Out with the old and in with the new (builds)!