The Government has announced a London Help to Buy Equity Loan Scheme which purports to bring home ownership within the scope of many currently frustrated first time buyers in the capital. The new venture is due to be launched in February and increases the maximum equity loan size to 40%. Leeds is set to similarly launch its own version around the same time.
NB (Stop Press) The scheme does not start until 1 February 2016: no applications for a 40% equity loan can be accepted until this date.
The existing UK Help to Buy Equity Loan Scheme, explained here in more detail (including all the eligibility criteria), works by making a Government loan of up to 20% of the selling price of a New Build property available to first time buyers and home movers with a minimum 5% deposit. The buyers then have only to secure a maximum 75% help to buy mortgage. The scheme will now be available until 2021.
NB (Stop Press) The scheme does not start until 1 February 2016: no applications for a 40% equity loan can be accepted until this date.
The existing UK Help to Buy Equity Loan Scheme, explained here in more detail (including all the eligibility criteria), works by making a Government loan of up to 20% of the selling price of a New Build property available to first time buyers and home movers with a minimum 5% deposit. The buyers then have only to secure a maximum 75% help to buy mortgage. The scheme will now be available until 2021.
How will the London Help to Buy Equity Loan Scheme differ from the UK scheme?
The London scheme, recognising that the capital has much higher home prices than the rest of the UK, offers an applicant a loan of up to 40%, so they only have to secure a maximum 55% help to buy mortgage. As before, they must have a 5% deposit. House prices in London average £509,000 (Land Registry - November 2015).What is classed as ‘London’?
Currently, details are incomplete, but you can reasonably assume that the London scheme is set to be available within the boundaries of the designated London boroughs, including the City of London.
Examples
1 - An eligible applicant wishing to buy a one-bed flat in Clapham priced at £300,000 must present a 5% deposit, i.e. £15,000. Under the existing scheme, they would be able to get a maximum £60,000 loan from the Government (20% of the selling price) and would then have to secure the remaining £225,000 from a lender.
Getting the mortgage might prove a challenge: with a 4.5x salary multiple to calculate the maximum mortgage normally offered, a lender would expect the applicant to have a £50,000 yearly salary, considerably higher even than the Greater London average. And, into the bargain, many commercial lenders have already, up to this point, decided not to take part in the standard Help to Buy scheme in London, fearing the exposure in the event of default. With the new London Help to Buy Scheme, the same applicant presenting the same deposit could secure a £120,000 loan, leaving a greatly-reduced £165,000 mortgage to be secured, requiring, using the same parameters, a smaller £36,700 yearly salary, fractionally above the current average London salary of £35,500.
2 - Two eligible applicants wishing to buy a two-bed flat in Brixton, price £400,000, would together need a £20,000 deposit (£10,000 each). Under the existing scheme, they could get an £80,000 Government loan, leaving them needing a £300,000 mortgage. Their joint household income would have to be £67,000 (made up e.g. by each earning £33,500 per year).
Under the new scheme, the maximum Government loan available would be £160,000, leaving them needing a £220,000 mortgage. This would require their household income to be £49,000, meaning, if each were contributing equally, they would both have to earn a much-reduced £24,500 yearly salary.
Getting the mortgage might prove a challenge: with a 4.5x salary multiple to calculate the maximum mortgage normally offered, a lender would expect the applicant to have a £50,000 yearly salary, considerably higher even than the Greater London average. And, into the bargain, many commercial lenders have already, up to this point, decided not to take part in the standard Help to Buy scheme in London, fearing the exposure in the event of default. With the new London Help to Buy Scheme, the same applicant presenting the same deposit could secure a £120,000 loan, leaving a greatly-reduced £165,000 mortgage to be secured, requiring, using the same parameters, a smaller £36,700 yearly salary, fractionally above the current average London salary of £35,500.
2 - Two eligible applicants wishing to buy a two-bed flat in Brixton, price £400,000, would together need a £20,000 deposit (£10,000 each). Under the existing scheme, they could get an £80,000 Government loan, leaving them needing a £300,000 mortgage. Their joint household income would have to be £67,000 (made up e.g. by each earning £33,500 per year).
Under the new scheme, the maximum Government loan available would be £160,000, leaving them needing a £220,000 mortgage. This would require their household income to be £49,000, meaning, if each were contributing equally, they would both have to earn a much-reduced £24,500 yearly salary.
Additionally, because foreign investors have bought up between 70-80% of all New Builds in London in recent years, prices have already been bid upwards and therefore potential Help to Buy Equity Loan Scheme applicants have very little choices of property, if any, with many doomed to remain dissatisfied.
What is indisputable is that if insufficient new homes are built – most experts calculate that 200,000 need to be built each year in the UK at current levels of population growth just to stop the present rate of demand from rising – Help to Buy will drive prices further upward.
