Treasury could make millions from Help to Buy

 
House with sold sign

Here is a bit more detail about how Help to Buy ll will work after it is launched by the Treasury on Tuesday.

I am told that the Treasury has told the banks it will charge them a supposedly "commercial" rate of about 0.9% for insuring up to three-quarters of the first 20% of losses on mortgages for homebuyers who cannot afford to provide a big deposit.

And apparently that 0.9% applies to the whole loan, not just the insured proportion.

The charge is necessary to prevent Brussels ruling the scheme as illegal state aid.

But it implies that Help to Buy ll could be quite a money-spinner for the Treasury. The government could receive annual revenues of just under £12bn a year (see update below please), if it were to provide guarantees on the maximum £130bn of mortgages it estimates that it could insure.

As one banker said to me: "Unless the mortgages go sour, the Treasury will clean up."

Start Quote

The interest cost on one of these Help to Buy mortgages will be in the range of 4.75% to 5.25%”

End Quote

What does this imply for the cost of this new generation of mortgages for first-time buyers and those who don't have money for a big deposit?

Well, if banks are currently charging 3.5% interest on a tracker loan, where the buyer has borrowed 75% of the value of the property (a 75% LTV), the minimum the banks would feel they could charge for the equivalent new taxpayer-insured mortgage would be 4.4%.

But, in practice, the banks will feel they need to charge a bit more even than that, because they are not transferring 100% of the top risk to taxpayers.

The reasons are these: the guarantee is in place for only seven years, whereas mortgage loans are typically for 20 years or more, which means that the insured portion of the loan will in time become uninsured; and all that is being insured is three-quarters of the first 20% of losses.

Since our regulators seem to be awake these days, they have spotted that the banks bear some residual risk on the insured portion of the loan.

The Prudential Regulation Authority has therefore made it clear that banks have to set aside a modest amount of capital to cover the retained risk on the insured portion of the loan. And allocating capital in that way costs money.

Which means that the interest cost on one of these Help to Buy mortgages will be in the range of 4.75% to 5.25%.

All of which is a roundabout way of saying that Help to Buy ll is not about providing cheap mortgages.

The point of it is to fill a gap in the market. Right now, it is almost impossible to get a mortgage from a bank if you don't have a deposit equivalent to about 25% or 30% of the value of a house.

Help to Buy ll will encourage the banks to provide mortgages worth up to 95% of the value of a property.

But those taking advantage of these 95% mortgages will have to pay an interest rate perhaps 50% higher than those borrowing 70% (5.25% v 3.5%).

It will be fascinating to see what kind of demand for these mortgages there will be.

Bankers tell me they think the take-up will be huge, that there is massive pent-up demand from those without sufficient accumulated savings to enter the housing market.

If they are right, Help to Buy ll could turn out to be a nice little earner for George Osborne and the Treasury (unless and until the bottom falls out of the housing market, and the insurance cover he's providing is called).

UPDATE 1045

OK. First of all I made a fat finger mistake: 0.9% of £130bn is just under £1.2bn NOT just under £12bn.

Why I didn't spot my howling error before my blog went live is utterly beyond me. But I didn't, so v sorry.

Second, I am told that the 0.9% on a 95% mortgage is a one-off up front fee, not a recurring annual fee.

And on a 90% mortgage the fee will be around half that.

So actually the recurring revenues to be earned by the Treasury may be hundreds of millions of pounds, not billions.

More importantly, perhaps, the recurring cost to the banks of the insurance will be rather less than I thought.

Which means that if, as they say, they are going to charge circa 5% interest for the help-to-buy mortgages they may be vulnerable to the allegation that they charging more than is necessary or fair.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 477.

    Somehow I just do not believe that anyone on this planet wants to save me money.
    But keep getting unwanted Telephone calls from people who want to do that.
    Then, have to contend with our nice Politicians. They all want to save me money.
    I buy a newspaper..to read the news.
    The news seems to be do not trust this or that Politician.
    But keep on buying what we are selling.

  • rate this
    0

    Comment number 476.

    I came across an enjoyable video on RT: Keiser Report Episode 506.

  • rate this
    0

    Comment number 475.

    Unfortunately, it will also put more money into the spray-tanned hands of estate agents and the blood sucking conveyancing firms that skulk in the shadows of every purchase and sale.

  • rate this
    0

    Comment number 474.

    Surely it was this sort of lending that brought about the banking crisis in the first place and now the government is advocating the return to unaffordable lending with them picking up some of the risk for the first few years, there's also the point that its limited to a max of "£600,000" and this is for first time buyers and new build. What land is this gov. living in

  • rate this
    0

    Comment number 473.

    This scheme will not work in higher price areas like London because the income required to service the mortgage and pay Council tax will be beyond most young people.
    The way forward is to increase the stock of publically owned housing for rent for those who can't afford to buy, and shared ownership.
    Much of the privately rented sector is a rip off and poorly maintained.
    Alan
    .

  • rate this
    0

    Comment number 472.

    We should accept that it is inappropriate for everyone to own their own home.
    Trying to extent the margin of owner-occupancy in the USA caused the economic crisis.
    When I got my first mortgage I had to demonstrate that I had saved for several years, could put down 10% deposit, had a steady job and my parents were guarantors.
    We should be building more houses to be let at subsidised rents.
    Alan

  • rate this
    0

    Comment number 471.

    Oh dear oh dear
    George is not charging enough to cover the risks of default.
    the lenders have no incentive to be prudent and refuse mortgages to those who present a risk of default.
    Borrowers are not being required to pay a market rate to cover the risk of default - despite us being assured by David that the borrowers may be capital poor but are income rich.
    Emigration anyone ?

  • rate this
    0

    Comment number 470.

    Robert, should this article now be deleted as it is total nonsense? Not everyone will read the full article and thus the update.

  • rate this
    0

    Comment number 469.

    I can understand part 1 of the scheme, as this encourages the building of new homes. But in a free market economy surely existing properties must be subject to the same constraints as all commodities, I.e. Income, verses property asking price and the ability to make repayments, when interest rates rise, the old system of tax relief on mortgages made far better sense.

  • rate this
    0

    Comment number 468.

    This really is great news for those of us who are stuck paying astronomical rents that are significantly higher than mortgage payments whilst struggling to save for a deposit and live any kind of life.

  • rate this
    0

    Comment number 467.

    What's this constant cry about repayments? A lot of people can comfortably afford the repayments, and most are paying more in rent, even with a rise in interest. The problem is saving the staggering deposit alongside paying rent within a time frame that won't leave you paying the mortgage off in your 70's. Also as time goes on and capital is paid off the risk to tax payers will reduce.

  • rate this
    +1

    Comment number 466.

    Of course this is nothing to do with an approaching election!

  • rate this
    +1

    Comment number 465.

    The policy should be putting a solid limit on mortgages at most 4 times annual income, along with a limit on rents of 80% of what mortgage repayments would be on that property.

    Likely outcomes as follows:
    many buy to rent homes would be resold because the rent would no longer cover the mortgage repayments.
    Ether the super rich would buy to rent or house prices would collapse

  • rate this
    0

    Comment number 464.

    I am very confused - isn't all this austerity we are being dished out based on the failings of the banks and now we as tax payers are gonna pick up the tab when this guarantee fails and people cant pay their mortgage - utter vote catching propaganda - Lunatics!!

  • rate this
    +1

    Comment number 463.

    Incredible. For all the criticism of the previous government, the Tories are now fuelling another huge bubble.


    .

  • rate this
    0

    Comment number 462.

    I think this measure is solving a problem HM Gov has created it will do nothing to stop house price inflation. In my view if they want to restrict house prices... tax house sales 10 or 20% of the value of the property above 150,000 no loopholes that tax level could increase by the RPI every year as a sort of house price escalator... It doesn't stop anyone selling for whatever price they wish

  • rate this
    +2

    Comment number 461.

    This is ECONOMIC SUICIDE - a cheap political stunt to buy votes in some key Southern marginals.
    Someone having a mortgage for £600,000 based on sensible income multiples should have a Gross combined Income of between £200,000 and £250,000 surely that should support a £30,000 deposit??
    The downside when interest rates rise is a massive problem reminiscent of FannyMae and FreddyMac

  • rate this
    +2

    Comment number 460.

    It could also be a disaster for the tax payer once the base rate goes up. Besides, that child in the Treasury claiming there's no housing bubble is crazy. A couple earning £60,000 together could afford a buy comfortably. And this year alone prices have gone up 6%. Osborne has effectively said "Your kids won't be able to afford a home, too bad."

  • rate this
    +3

    Comment number 459.

    It all sounds so "helpful" at the beginning until you come to sell the house than you realise your house is actually not worth the price they promised you in the first place. This is a scam, beware!

  • rate this
    +2

    Comment number 458.

    Help to buy scheme would only help builders to sell their unsold stock at inflated prices followed by negative equities and those unable to afford repayments would face repossessions and another credit crunch of 2008 proportion.

    Have we forgotten that?

 

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