Mortgage blog: Help to Buy may help you – but don’t expect it to be cheap

Posted 25 October 2013

The government's flagship Help to Buy scheme is designed to make it easier for people to buy a home with a small deposit. Launched three months ahead of schedule, the second part of the initiative is set to make access to 95% mortgages more widely available with the government providing a guarantee against defaults on these loans.

While the scheme is set to help thousands of people get access to a home loan, it won't drive down the price of a low-deposit mortgage. That's the view of a leading industry expert who believes that while the scheme will be a huge benefit to buyers they shouldn't expect rock-bottom rates.

Expectations that Help to Buy will offer low rate deals ‘look optimistic'

The Help to Buy scheme is set to help with the "pent-up demand" for mortgages without necessarily making 95% deals cheaper, according to a leading expert. Lloyd Cochrane, head of mortgages for Royal Bank of Scotland and NatWest, believes the scheme will benefit thousands of potential homeowners but that borrowers shouldn't expect record-breaking interest rates.

Mr Cochrane told the Daily Mail that the pricing of low deposit mortgages has to reflect the price the lenders are paying for the government guarantee as well as the risk they still face when it comes to an end after seven years.

He said: "One thing we are paying the government for is the cost of the guarantee. We are not completely transferring the top risk to the guarantor, there is an element which we maintain within the 15% that the government guarantee covers. We share 5% of that risk, the guarantee is seven years but mortgages have a 20-year life. We have to reflect that the guarantee expires before the mortgages do. I expect there to be competition on rates, as for what direction they go in, one of the big drivers will be how much it costs to provide fixed rates."

RBS and NatWest's initial Help to Buy deals include fixed rates at 4.99% for two years and 5.49% for five years. While the bank benefits from the government guarantee on these schemes, the rates are not significantly better than 95% deals on offer through other lenders. For example, the Newcastle Building Society has a non-Help to Buy 95% deal at 5.95% fixed for two years with a low £195 fee.

The Daily Mail concludes that "expectations that the scheme would put borrowers with only 5% on the same footing as those with a much bigger deposit look optimistic".

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