House magic won’t work
Next week marks the launch of NewBuy, the government’s new plan to help first-time buyers on to the housing ladder. The big idea is to underwrite a portion of a new mortgage on a new-build house, so shifting the loan-to-value (LTV) ratio and allowing even buyers with a small deposit to get a loan.
It works like this. The buyer puts down a 5% deposit on a new-build. The bank lends the remaining 95%, but the government and house builders backstop nine of those percentage points. The house builders take on the risk of 3.5% by putting the equivalent in cash in an indemnity account, and the government guarantees another 5.5%. The result? A bank can offer a 95% mortgage but only be on the hook for an 86% loan. Magic.
Well, sort of magic anyway. The scheme only works if the banks fancy the idea of giving out 86% LTV mortgages. But right now it seems that 86% doesn’t really do it for them much more than 95% does, presumably because they know that the risks to house prices, and new-build prices in particular, are very much to the downside.
• Read the full editor’s letter here: House magic won’t work.