Banks back in 95% mortgage market

A clutch of major high street banks plunged back into the 95% mortgage market today lured by £12 billion worth of guarantees from the Government as it launched the latest phase of the controversial Help to Buy scheme.

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HSBC is participating in the Government's Help to Buy programme

A clutch of major high street banks plunged back into the 95% mortgage market today lured by £12 billion worth of guarantees from the Government as it launched the latest phase of the controversial Help to Buy scheme.

Treasury officials believe the initiative will cost taxpayers nothing as lenders will pay a fee for the guarantee, which will underwrite up to 15% of a property's value.

Instead it is buyers who will face a premium for being able to own their own homes with a deposit of only 5%, as borrowing rates look set to be much more costly than for smaller loan-to-value (LTV) deals.

State-backed Royal Bank of Scotland, NatWest, Halifax and Bank of Scotland, together with Virgin Money and the start-up Aldermore Bank were already signed up to the scheme as it was launched by the Government today.

It later received a major boost when HSBC also joined, meaning lenders representing more than 40% of the market are now committed to the initiative.

So far the lowest rate available for borrowers is being offered by Royal Bank of Scotland and NatWest at 4.99% for a two-year fixed rate deal with no fee, while Halifax is offering a similar deal with a 5.19% rate and a £995 product fee.

Lenders have been given freedom to set the rates but Treasury officials expect that as more banks take part in Help to Buy they may come down.

Martin Lewis, founder of consumer help website MoneySavingExpert.com, said while the deals were cheaper than existing 95% mortgages, they were still "very costly" compared with others with lower LTV deals.

For example, the Skipton Building Society is already offering a two-year fee-free deal with a 10% deposit at the much lower rate of 3.99% while those who have a 40% of a property's value can borrow for as little as 2% interest on other deals.

Estate agent Haart predicted Help to Buy would boost property transactions by 10-15% in the next 12 months and reduce the average deposit required by first-time buyers from £33,948 to £7,218.

The new scheme was launched after officials decided to address a perceived "market failure" after high loan-to-value mortgages dried up following the credit crunch and have since failed to return to widespread availability.

It has been designed to try to ensure that only credit-worthy borrowers can obtain the loans, with other measures to ensure banks do not simply use them to hive off their riskiest customers.

Mortgage applications must also be subjected to "stress tests" to see if buyers will be able to continue repayments when faced with rising interest rates - though the Treasury has not fixed any criteria for these tests.

Only residential properties valued at £600,000 or less can be bought under the scheme and interest-only loans are banned. They cannot be for second homes, buy-to-lets, part of a shared equity scheme, or subject to another guarantee.

The Help to Buy guarantee covers the first seven years of the mortgage. The risk then returns to the lender. Banks will be charged a one-off fee depending on the size of the LTV ratio. Rates will be revised each year.

For 2014, they will be 0.9% for a 90-95% loan, meaning that for a 95% loan on a £200,000 property, the fee to a lender would be £1,710. The rate drops to 0.46% for the 85-90% band and 0.28% for the 80-85% LTV level.

The maximum loan under the guarantee scheme will be £570,000. Lenders found to be in breach of the scheme's rules can be banned.

Originally due for launch at the start of the new year, the scheme was brought forward so that applications could begin from this week - though the guarantee itself will still not apply until January.

Critics fear it could spur a housing bubble but Treasury officials believe the market remains relatively subdued, particularly outside London and South East hotspots.

A first phase of Help to Buy offering loans of up to 20% of a property has already helped more than 15,000 people buy a home in England.

The new mortgage guarantee part of the scheme will be available across the UK. It has been estimated 180,000 loans could be taken out every year under the initiative.

RBS and NatWest are extending opening hours at 740 branches for two weeks to cope with an expected flood of demand.

Customers can get information from these banks today and start applying for their Help to Buy mortgages from tomorrow.

At Lloyds-owned Halifax, customers can begin applying from Friday for products. Another Lloyds brand, Bank of Scotland, will also take part, though not Lloyds Bank.

Virgin and Aldermore are due to take part from January and the latter is exploring whether the date can be brought forward, the Treasury said.

The £12 billion in loan guarantees will not be included in Government borrowing figures.

Chris Leslie, shadow chief secretary to the Treasury, said: "If ministers are serious about helping first-time buyers, they should bring forward investment to build more affordable homes."

Visiting a new housing estate in Weston Favell, Northampton, the Prime Minister said he believed the scheme would help the housing shortage.

David Cameron, accompanied by new Housing Minister Kris Hopkins, was shown around a three-bedroom show home and met first time buyers Kayleigh Groom, 28, and her partner Chris Day, 29, from Kettering.

Ms Groom, who works in data management and Mr Day, who works in engineering, had been renting for five years and told Mr Cameron the scheme would enable them to get on the property ladder.

Mr Cameron said: "I think it is a big part of the answer because what we're doing is making sure that the typical family can buy the typical home.

"The couple I've just been with. They've both got good jobs. They've both got good prospects. They can afford mortgage payments but because they haven't got a rich mum and dad they can't get a mortgage. That isn't fair. That isn't right.

"So the help to buy scheme will help them to get a mortgage and buy a home and make them homeowners which is what they want and what I want for them."

When asked whether the scheme could create a housing bubble, Mr Cameron said: "I don't believe it will. If we look at house prices across the UK, if you exclude London and the South East, they're only going up by 0.8 per cent a year and here on this housing estate because of the help to buy scheme the people have built this have just explained to me that they're going to build more, they're going to bring forward more of this housing development because of the Help to Buy scheme.

"It's wrong to think Help to Buy is just helping on the demand side. Its also helping with the supply for the simple reason that the builders won't build unless the buyers are able to buy. So I think this is helping to unlock the housing market which is part of a good and balanced recovery."