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Help to Buy 2nd phase brought forward

Government scheme to open up housing market will be introduced 8 October 2013 – three months earlier than originally planned

Mortgage approval rates are now higher than at any point since the beginning of 2010

Help to Buy aims to open up the housing market but first-time buyers could lose out due to higher interest rates

The government has brought forward its controversial Help to Buy scheme, which aims to open up the housing market to potential buyers who were previously priced out.

As the Conservative Party gathered for its annual conference in Manchester, David Cameron said the initiative – which was initially earmarked to begin in January – will now be launched on 8 October 2013, enabling people with small deposits to get their foot on the property ladder with a 95% mortgage.

Making dreams a reality

Speaking on the BBC’s Andrew Marr Show, the prime minister said the decision has been made to make people’s housebuying dreams a reality, as the market is currently recovering from a “very low base”.

He explained: “If we don’t do this it will only be people with rich parents to help them who can get on the housing ladder – that is not fair, it is not right.

“As prime minister I am not going to stand by while people’s aspirations to get on the housing ladder are being trashed.”

Bubble trouble

The scheme has been welcomed by those who have previously been unable to access mortgages due to insubstantial deposits, but have drawn criticism from many analysts – as well as high-profile figures such as business secretary Vince Cable – who claim that it could lead to a house price bubble, particularly in the south-east of the country.

However, Mr Cameron dismissed any concerns, instead urging people to place faith in the Bank of England, which has been given a greater role in tracking the scheme’s effect on property values.

The Bank of England has also announced that mortgage approval rates reached a 5-year high in August, but remains far below the rate recorded in 2007.

Industry reaction to the scheme has been mixed so far, with HSBC, Barclays, Santander and Nationwide so far abstaining from participation, though Lloyds, RBS and NatWest have all signed up.

Meanwhile, the BBC’s Robert Peston believes that Help to Buy II could be a “money-spinner” for the Treasury who will be charging the banks 0.9% for insuring any losses made from the loan.

This also means that banks are likely to charge a higher interest rate of around 4.75% to 5.25% for Help to Buy II customers – up to 50% higher than the those borrowing without the government scheme.

First-time buyers and those who were previously priced out of the market are likely to feel mislead by the government’s marketing of Help to Buy if the interest rates are increased but the banks have yet to reveal how they will approach the new scheme.

Waiting game

Mr Cameron revealed that the second phase of Help to Buy, which had been due to launch in January 2014, will see the government underwrite 15% of the value of a mortgage, enabling people to get a mortgage of up to 95% on any property up to the value of £600,000 with a 5% deposit.

This represents a shift from the first phase, which provided an equity loan of 20%, allowing homebuyers to get a 75% LTV mortgage with a 5% deposit.

Instead of paying back the government’s equity loan, the Help to Buy second phase is a mortgage guarantee, which comes at a price for homebuyers.

However, the details still require clarifying with many banks unable to make the terms of the second phase of the Help to Buy scheme clear to customers.

The new announcement means that applications for loans from the scheme can now be made from 8 October, though they will not be paid out until 1 January, meaning home purchases cannot be completed until 2014.

Anyone hoping to complete on their home purchase using the second phase of Help to Buy before 2014 will not be able to.

Areas for improvement

Though the prime minister hopes the scheme will sustain the housing market recovery, Labour has argued that other areas of the industry need urgent attention if this recovery is to continue, namely housebuilding.

Shadow Chancellor Ed Balls commented: “Unless David Cameron acts now to build more affordable homes, as Labour has urged, then soaring prices risk making it even harder for first-time buyers to get on the housing ladder.

“You can’t deal with the cost of living crisis without building more homes, so it’s no wonder that for millions of families this is no recovery at all.”

Further details on the Help to Buy scheme and the clarification of Mr Cameron’s recent announcement will be made in his keynote speech at the Conservative Party conference on Wednesday (October 2nd).