Over 8 years, the UK Government’s Help to Buy shared equity
scheme has facilitated the purchase of more than a quarter of a million new
homes. During this time, Help to Buy has accounted for around 40% of all new
An unintended consequence is that Help to Buy has all but
eliminated high loan to value mortgages for new build properties. Lenders have
no need to offer 95% or even 90% loan to value mortgages when Help to Buy
provides 75% loan to value mortgages for only a 5% deposit.
From the end of March 2021, Help to Buy was restricted to
first time buyers only, with regional price caps in place. The West Midland has
been capped at £255,600 meaning that 1st time buyers in this area could
only purchase a home up to the value of £255,600 using the help to Buy Scheme.
House builders report that this has affected almost 50% of Help to Buy sales
(approximately 25,000 homes a year in England alone).
As of end March 2023, the ever-popular Help to Buy Scheme
comes to an end as HM Government will not be providing the 20% loans for first
time buyers. This could have led to a huge problem for first time buyers and
established buyers alike as obtaining a deposit is often the major factor
stopping buyers from purchasing a home. With average house prices in the UK
around £275,000 (Dec 2021), the usual 25% deposit required by most lenders
equates to a staggering £68,750 which is unachievable to most buyers who don’t
have existing equity in their homes to use as a deposit.
The solution - Deposit Unlock.
“Deposit Unlock is structured to offer lenders a protected
way of lending at 90.01-95% LTV. This is achieved by offering the lender an
insurance scheme which insures each individual loan down to 60% LTV. For
example, on a 95% LTV loan, the scheme offers 35% protection to the lender.
Therefore, lenders are protected for loss on sale of up to 40% of purchase
value on a loan-by-loan basis (including deposit), less a lender retained 5%
share or ‘vertical slice’ as seen in the illustration.
This solution rests on a two-pillar protection structure,
funded by the house builders. This is achieved by establishing a captive cell
within the Artex PCC, Gallagher Re’s sister company, which issues mortgage
indemnity insurance policies to lenders, protecting the lender against loss in
the event of a repossession. The coverage is free to lenders and allows them to
offer competitively priced high LTV mortgages on new build flats and houses.
The fund, which backs the insurance, is made up of two elements: 1. The first
is a cash layer to meet the initial losses. This is provided by the house
builder and will be refunded to them, net of any claims, at the end of the
term. 2. The second is a far deeper second loss reinsurer layer. This is
provided by an A- rated entity and the builders pay the premium.
The total cost of running the entire scheme and funding the
coverage is around 2.5% of each house sale for the builder, although house
builders stand to receive over 1.3% of this amount back if there are minimal
losses. The contribution from the house builder is funded on completion,
providing immediate protection for the lender.”- Gallagher Re November 2021
In short, this means that buyers of new homes are now able
to purchase a new build home with only a 5% deposit as they previously could with
Help to Buy. As lenders will be protected against losing out if buyers do not
keep up their repayments in the early years where depreciation is most likely
to happen, 95% loan to value mortgages will no longer prove so risky for
lenders. This means that instead of issuing 75% loan to value mortgages with
20% temporarily covered by HM Government, now buyers will be applying for a 95%
mortgage straight away, rather than deferring 20% of the value for 5 years via
a loan. This makes it easier for buyers to budget their repayments straight
away rather than having a second payment due in 5 years’ time.
This should be fantastic news for the construction industry
relating to new homes. It will open up affordable mortgages to everyone again
rather than just 1st time buyers, meaning that the sale of new build
homes should continue to rise.