News Review: Specialist Prime
It is definitely time to be positive about NewBuy by Charles
Haresnape, managing director, Aldermore Residential Mortgages
There’s no truer saying than ‘it’s easier to criticise than to give praise’. It certainly came home to me when Aldermore launched its Family Guaran- tee Mortgage. Although the response from the market was overwhelmingly posi- tive, there were a few who expressed concern that the product may cause the mar- ket to overheat once again. The market didn’t over- heat and the Family Guaran- tee Mortgage is doing exactly what it was designed to do: help creditworthy first-time buyers get a foot on the first rung of the housing ladder - with a bit of help from mum and dad. It doesn’t provide a solution for everyone and it’s not going to cure the prob- lems of the housing market all by itself. But it’s a step in the right direction. I was therefore not sur- prised to see a number of in- dustry commentators point the finger at the govern- ment’s recently announced NewBuy housing scheme and criticise it for tempting desperate first-time borrow- ers to overstretch themselves. Is the criticism justified,
or is it just a case of pundits using NewBuy as a platform from which to make their own voices heard?
NewBuy NewBuy will not be a com- prehensive answer for
all
want-to-be first-time buyers, but it will provide a solution for some and surely that has to be a good thing? I’ve worked in the housing and mortgage markets long enough to realise that the perfect panacea rarely, if ever, exists. But I also know that the mortgage industry has an almost infinite capacity for being inventive and what it can do well is create a range of solutions which have the combined ability to make a real difference. NewBuy is designed to help house buyers who are struggling to raise a deposit, whilst at the same time giv- ing the construction industry an incentive to start build- ing once again. The scheme makes mortgages of up to 95% loan-to-value available to buyers who purchase a new build property from a participating builder. At the moment, there are ten par- ticipating construction firms and a handful of lenders sup- porting the scheme. In order to encourage lenders to participate in high LTV lending, builders pro- vide a guarantee equal to 3.5% of the purchase price and the government provides an additional guarantee for 5.5%, making a total guar- antee of 9%. The scheme is open to anyone buying a new house worth up to £500,000 from a participating builder in England and purchasers don’t have to be first-time buyers. They do, however, have to have a deposit of at least 5%.
Pros and cons
So what are the scheme’s pros and cons? On the plus
14 MORTGAGE INTRODUCER APRIL 2012
“Purchasers don’t have to be first- time buyers. They do, however, have to have a deposit of at least 5%”
side, it incentivises builders to build and buyers to buy - which is a laudable objective. There are already some com- petitively-priced mortgage deals on offer from 4.29% for a two year fix. Again, good news for cash-strapped house buyers. On the downside, it’s only
available in England but not Wales, Scotland or Ireland; it won’t help borrowers who can’t raise a 5% deposit and it won’t help borrowers who fail to meet lenders’ stringent criteria or who want to buy an existing property. There is also concern that the scheme favours large lenders who, having adopted the Basel 2 IRB risk weight- ing model, get capital relief from the builder and govern- ment guarantees,
whereas
smaller lenders who use the standardised approach do not. This therefore puts smaller lenders at a consid- erable pricing disadvantage and could result in a less competitive market.
Higher LTVs And what about the criticism that 95% lending runs the risk of encouraging overzealous lending once again? I don’t see NewBuy either causing the market to overheat or encourage lenders to adopt bad practices once again. The
truth is that the scheme is too restricted in its availability to generate a market-moving step change in lending vol- umes. And lenders are too cautious about lending above 75% LTV - even with govern- ment and builder guarantees - to suddenly throw caution to the wind. It’s also worth bearing in mind that lending up to 95% LTV was not the cause of the issues that eventually led to the credit crunch. The credit crunch was brought on by reckless
sub-prime
lending by US banks, which had a ripple effect on capital markets around the world. Provided lenders continue to be prudent with their un- derwriting, there is no reason for
any schemes designed
to help first-time buyers to cause the markets to over- heat once again. NewBuy is one of a number of solutions designed to help struggling first-time buyers. And there is little doubt that first-time buyers need help when it comes to buying property. Raising large de- posits is still the number one issue preventing buyers from getting onto the housing lad- der and for that reason alone, NewBuy deserves support. NewBuy also gives brokers a good reason to contact clients to make them aware of alternative solutions to a long-lasting problem. I do hope that a summer of
Diamond Jubilee and Olym- pic celebrations puts people in a positive frame of mind once again - without making the mortgage market pause too much as
it has been
known to do during World Cup tournaments!
www.mortgageintroducer.com
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