Thursday, 22 August 2013

The help to buy scheme is mental

The government’s help to buy scheme is all sorts of bad rolled into one. Here’s some quick context as to why; one of the main things the actual and former building societies that blew themselves up in the financial crisis did to blow themselves up was to lend too much against assets. House costs £100 grand? Here, borrow £120 grand - i.e. a loan to value or LTV of 120% - so you can buy new furniture and a car as well. 

Things subsequently changed with the onset of  the credit crunch - we’re still very much in - as (a) the more mental banks failed/where taken over and (b) the remainder started using tighter lending criteria to ration credit, that being what a credit crunch is.

Or in more straightforward terms, there aren't any banks willing to do stupid LTVS. Or in even more straightforward terms borrowers have to stump up a much bigger deposit.  The problem is in a consumer driven economy and our consumerist culture - at a time when actual policy is to keep real savings rates negative to encourage spending and borrowing - borrowers need and want to spend rather than save, hence the housing market falling into the doldrums, people moaning on about not being able to buy a house and Sarah Beeny not getting as many channel 4 presenting gigs as she used to.

In response, the help to buy scheme neatly fills the gap between the deposits consumers have and what banks are willing to lend, so go go help to buy. Except, the amount banks are willing to lend is saying something very straightforward, which is this; we do not consider lending at high LTVs to be an acceptable or affordable risk. 

Turns out the government response to this is to say fair enough we’ll put the taxpayer on the nail to cover the gap - i.e. take on board the risk you consider unacceptable - between the deposit someone has and what you’re willing to lend. Lovely.

Now, another thing the actual and former building societies that failed  failed to do was to adequately price for risk. Again that’s not so much the case these days. Here’s the mortgages the post office is offering as of today to illustrate what I mean: 
  • For a mortgage where the LTV is 60% the overall cost for comparison is 4.2%.
  • For a 75% LTV its also 4.2%, 
  • By 80% LTV its crept up to 4.3%.
  • It's 4.4% for an 85% LTV mortgage. 
  • Finally, at 90% LTV it’s 4.6% or 4.7% for a 5 year fixed rate mortgage. 
 I’d put in the 95% rate except they don’t do one that high. Similarly told me there aren’t any mortgages for an LTV above 90%, presumably because EVERY bank in Britain right now thinks that’s just too risky. Still, the Post Office example makes the point, which is the higher the LTV, the more expensive the mortgage i.e. the greater the return required to compensate for said risk*.

This is nice and straightforward really; more risk = borrowers being charged more to borrow, that being what the lender uses to encourage bigger deposits and to cover the losses lending to higher risk borrowers entails (think whatever 1000% p.a. Wonga charges if you want another example).

Now lets look at the terms of the help to buy scheme: “you’ll need to contribute at least 5% of the property price as a deposit” – here, hang on a mo, this taxpayer backed scheme is open to people with a deposit the British banking industry considers too low? Crikey. Well I hope there’s a charge to compensate for the risk this involves …… “You won’t be charged loan fees for the first 5 years of owning your home.” – sorry? Are you serious? Nothing extra, like not a penny? Nope, I missed the small print; “In the 6th year, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year”. Thank Christ, so its not simply a handout intended to turn house buyers into Tory voters.

Except, hang on a mo, going back to the Post Office example, the higher the LTV, the greater the risk, the more the borrower should be charged isn't it? So what about the help to buy scheme, like if I got support worth 20% of the place I was wanting to buy I’d presumably have to pay more than if it was only 5%, wouldn’t I? Wouldn’t I?

Nope, you’d be charged the same, which is nothing for 5 years i.e. the government’s scheme not only puts the taxpayer on the nail for risks banks are no longer willing to take, it appears to take absolutely no account of the different degrees of risk doing so involves. Even worse it creates an obvious incentive to get as much government aid/save as little as possible because to the recipient its essentially 5 years worth of free money be it bridging the gap between a 5% or a 15% deposit and what a bank will lend. Brilliant, so this actively encourages an increase in the risk being dumped on the taxpayer. And, as the Post Office example shows, because it lets borrowers reduce the LTVof their mortgage, they get to borrow at cheaper rates.

Obviously, a lot of things can happen over 5 years. House prices can be kept unsustainably high, helping people borrow more will kick hard against the deleveraging that’s supposedly a central plank of government policy, it'll expose more people to the risk of interest rates rising in however many years time than might otherwise have been the case etc.,. Oh and because of the time it takes builders to respond to market signals cos  it actually takes a while to build a house, then other than Wimpey and what no getting to trouser the profits resulting from a sudden pick up in house prices,  it won’t actually do hee haw about the size of the total housing stock either this year or in 2014.

So in return for the potentially Orish levels of risk the government has decided to dump on us all, this risk being something the entire banking sector is simply unwilling to take on (and the associated potential damage to Britain’s credit rating against which Osborne used to say he should be judged, that being presented as a reason why there’s all those shitty spending cuts) we’re officially getting f’all before 2018 in return**.

* the risk here is straightforward – can’t afford to pay your mortgage? The bank repossesses your house and sells it to repay what its owed. The higher the LTV, the less likely the bank is to get all of the mortgage repaid (what with it being a fire sale, the borrower not having had enough money to keep the property up to scratch and so on). 

** Reading a bit more its banks that appear to have to pay a fee. Hiding things behind the scenes like that just makes this look even more like bribing voters.

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