U.K. Chancellor of the Exchequer George Osborne began the second phase of his mortgage-boosting plan as concerns persist that it will fuel a property bubble.
Royal Bank of Scotland Group Plc’s Natwest unit and Lloyds Banking Group Plc’s Halifax and Bank of Scotland will start offering Help-to-Buy mortgages this week, with Virgin Money Holdings U.K. Ltd. and Aldermore Bank planning to start in 2014, the Treasury in London said in a statement today. The program allows people to buy a home costing as much as 600,000 pounds ($964,000) with a deposit of as little as 5 percent.
The first phase came into effect in April, and Prime Minister David Cameron last week brought forward the start of the second from January, dismissing criticism that the plan may help fuel a bubble. Halifax said this month that house prices rose for an eighth month in September and lawmaker Andrew Tyrie, who heads the Parliament’s Treasury Committee, said today that intervention in the property market risks causing distortions.
“The government has yet to allay the committee’s concerns,” Tyrie, a member of Cameron’s Conservative Party, said in an e-mailed statement as the panel published a report in London. “Given the checkered history of interventions in residential property, great care will need to be taken in both the construction and running of this scheme.”
Under the mortgage plan, the government guarantees as much as 15 percent of the purchase price in return for a fee from the lender. Fees will be charged as a percentage of the original loan amount and be reset every year. For 2014, they will range from 28 basis points, or 0.28 percentage point, for mortgages between 80 percent and 85 percent of the value of the property, to 90 basis points for loans between 90 percent and 95 percent, Osborne said in a written statement to lawmakers today.
Cameron said today the government “had to act” to help prospective homebuyers.
“Too many hardworking people are finding it impossible to buy their own home,” the premier said in an e-mailed statement. “Buying your first home is about far more than four walls to sleep at night. It’s somewhere to put down roots and raise a family. It’s an investment for the future.”
Halifax customers will be able to apply for mortgages under the program starting Oct. 11. The bank is offering a two-year fixed-rate of 5.19 percent. That’s more than the 1.94 percent fixed rate it offers first-time buyers who can put down a 40 percent deposit, according to the bank’s website.
Similarly, RBS is offering two- and five-year fixed rates at 4.99 percent and 5.49 percent. That compares with a two-year fixed-rate of 1.95 percent for first-time buyers who are able to put down a 40 percent deposit, according to its website.
HSBC Holdings Plc said in an e-mailed statement today that it will also participate in Help to Buy later this year, extending its current range of mortgages to include borrowers with deposits of as little as 5 percent. Osborne said the government expects more lenders to sign up in coming months.
Figures compiled by the Bank of England show the average two-year fixed rate on 75 percent loan-to-value mortgages was 2.56 percent in August, and 4.51 percent on 90 percent loans.
Business Secretary Vince Cable, a member of Cameron’s Liberal Democrat coalition partners, and the International Monetary Fund have also expressed concerns about Help to Buy. The Bank of England has said the market is recovering from low levels of activity, though it pledged last month to be “vigilant to potential emerging vulnerabilities.”
The prospect of continued low interest rates may also be supporting the market. The BOE introduced forward guidance in August and said it won’t consider raising its benchmark rate from a record low until unemployment falls to 7 percent, something it doesn’t forecast happening until late 2016. The policy includes three conditions that may void the pledge.
“One of these is financial stability and a housing bubble could certainly bring this knockout into play,” said James Knightley, an economist at ING Bank in London. “It is early days and much of the action is centered in London and the southeast, but given housing activity has a high correlation with general economic activity, we feel that the BOE will start to tighten monetary policy much earlier than late 2016.”