THOUSANDS of buyers with small deposits who apply for a home loan under a government scheme launched last week risk walking straight into negative equity, mortgage lenders have warned.
Under NewBuy, borrowers will be able to secure a competitively priced mortgage to buy a new-build flat or house with only a 5% deposit. The government and builders provide a guarantee to protect lenders from potential losses.
NewBuy is designed to help desperate first-timers excluded from the mortgage market by banks that want hefty deposits. The government also hopes it will fuel demand for new-build homes, so boosting construction firms.
However, experts warn that the premium charged by builders for new-build properties could cause the value to fall from day one.
Trade body the Council of Mortgage Lenders said: “Borrowers . . . should be aware that some newly built properties include a premium on the sale price that can be reduced as soon as someone moves in.”
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Ed Stansfield, chief property economist at Capital Economics, said: “There is an implication in the scheme that house prices will fall. The guarantee has had to be built in otherwise banks simply wouldn’t be willing to lend on these terms.”
How does NewBuy work?
Up to 100,000 borrowers will be able to apply for loans worth up to £500,000, and while this is aimed primarily at first-time buyers, other home movers can also apply. Under the scheme’s complex terms builders contribute 3.5% of the property prices to a fund held by the lender, and the government provides an additional guarantee of 5.5%.
These funds provide a mortgage indemnity guarantee to protect banks against any losses if the property falls in value and has to be repossessed.
What are the deals available?
So far only Barclays, NatWest (part of Royal Bank of Scotland, which is 83% owned by the taxpayer), and Nationwide were ready to offer NewBuy deals when the scheme launched last week.
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Halifax, the biggest lender, has promised to join the scheme next month, while Santander will introduce deals by the middle of the year.
NatWest has the most competitive NewBuy deals, with a five-year fixed-rate deal at 4.99% and a two-year fix at 4.29% — both entailing a £499 fee. It will lend on properties worth up to £500,000, but the deals are not available through brokers. They are considerably cheaper than the normal deals for borrowers with a 5% deposit.
For example, Skipton building society has a five-year fix at 6.29% (with a £195 fee). Someone borrowing £200,000 would pay £1,168 a month on the five-year NewBuy deal from NatWest, compared with £1,324 with Skipton.
Is there a risk of negative equity?
Valuations carried out by mortgage lenders on new-build properties usually assume it is worth 2%-5% less on the open market; a 5% fall in the property value would wipe out the stake put down by borrowers.
Some brokers argue there is potential in new-build for price rises, particularly houses.
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Ray Boulger of John Charcol, the broker, argues that most people will spend money improving their properties, which increases the value.
However, new-builds could be more at risk if house prices start to fall again, although it depends on the location.
New-build flats in Yorkshire and Humberside, areas that have suffered steep price declines, have fallen by a hefty 25% over the past five years, while period flats in the same area have dropped by only 8%, according to Knight Frank, the estate agent.
What are the prospects for house prices longer term?
The Centre for Economics and Business Research, the think tank, predicts that UK house prices will rise 0.8% this year and by 15% come 2016, but other forecasters are less optimistic.
Capital Economics says house prices remain stubbornly high and predicts falls of 5% this year and 5% next year.
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Are there any alternative schemes?
First-timers who want to buy a new-build property could be better off with First Buy, the government-backed shared equity scheme that was launched last year.
Under the scheme the government and developers provide an equity loan worth about 20% of the value of a property to first-time buyers who already have a 5% deposit.
Borrowers can then apply for mortgages at rates typically reserved for buyers who have a larger 25% deposit. The shared equity loan is interest-free for the first five years. Nationwide offers 4.09% fixed for five years for First Buy.
What if I don’t want a new-build?
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According to moneysupermarket.com, the price comparison site, there are 40 deals available for buyers who only have a 5% deposit.
Brokers suggest smaller building societies are a better bet for those with a small deposit.
As well as the Skipton five-year deal, Saffron building society has a three-year fix at 5.79% with a fee of £195, while Newcastle building society offers a two-year fix at 5.95% with a £995 fee.
Borrowers could also sign up to the Lloyds TSB Lend a Hand scheme, which works in a similar way to First Buy, but uses family cash as additional security and is available for any property.
Borrowers are required to put down a 5% deposit while parents transfer savings equal to an additional 20% of the value of a property into an account that pays 4%. Buyers are then able to gain access to the more attractive rates usually reserved for those with larger deposits.
A three-year fix through Lend a Hand carries a rate of 4.19%, and a £999 fee.
Case study: Moving out at last
Nick Derrick, 28, and his fiancée Alana Wells, 27, are moving into their first home tomorrow. The couple, from Hornchurch, Essex, approached Nationwide, looking for a deal with a 5% deposit. Derrick said: “We saved for six months, but we wanted to move out of our parents’ homes as quickly as possible because we’re getting married in October, so didn’t have time to save more than 5%.”
Nick, a sales manager, and Alana, a PA, chose a three-year fix at 6.2% with Nationwide to buy a three-bedroom house in Hornchurch for £235,000. “We saw the 95% loan- to-value deal advertised in the paper and popped in for a chat, and it was actually quite simple sorting out the mortgage.”