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NewBuy Questions & Answers

Why is new NewBuy being heralded as a potential break through by the development industry?

NewBuy is a new scheme that will facilitate mortgages of between 90 and 95% for new build properties. The fundamental issue facing the UK housing market has been the lack of availability of mortgage finance. Higher loan to value products were withdrawn from the market which has meant that buyers of new build properties have typically needed to find a 20% deposit (in the region of £40,000 to buy a £200,000 home).

The result has been that many first time buyers have effectively been frozen out of the market. With the NewBuy scheme this could change.

Who qualifies for the scheme?

It is available to both First Time Buyers and Movers

It is available on both New Build flats and houses up to a maximum purchase price of £500,000 (subject to lenders’ criteria) in England only. The fact that it’s available to buyers of flats is particularly important because the mortgages available on flats were often as low as 75% LTV. This has tended to mean that there have been fewer apartments built which are typically the types of product a first time buyer often buys.

It is important to understand that stringent credit checking and qualification will remain in place to ensure that customers are credit worthy. 95% lending together with a suitable insurance policy was a central plank of the housing market in the past prior to the relaxing of credit and the credit boom.

How are the banks able to offer these higher loan to value products?

An insurance scheme backed by the housebuilders and the Government has been put in place that insures the lender. A captive insurer, known as a Protected Cell Company (PCC), set up in Guernsey and owned by HBF, will offer an insurance policy to lenders which will cover them for 95% of all losses incurred as a result of default on the mortgage during the first 7 years of the mortgage.

The captive will be split in to cells, which will be specific to each builder/ lender relationship and will be funded by a builder contribution of 3.5% of the purchase price. Should the funds not be exhausted by losses, any capital remaining will be returned in years 8, 9 and 10 of the scheme in the form of a dividend to the builder.

The captive will be further backed by a government guarantee of 5.5% of the purchase price, which lenders can draw on should the builders’ funds be exhausted. The guarantee is capped at £1 billion pounds which is expected to allow the sale of 100,000 homes.

What are the qualification criteria?

For a loan to qualify an offer must be made by March 2015. In addition it must be a repayment mortgage.

At least one party to the mortgage must be a UK citizen or have indefinite leave to remain

It must be for a principal or sole residence- i.e. no buy to let or second homes. No additional incentives (other than carpets and curtains) are allowed under the scheme -

Won’t this be rather expensive for the customer as the banks will price in the additional risk?

For the lenders the risks will be significantly reduced because of the insurance product. Whilst lenders have not clarified their pricing, rates are likely to be attractive to customers and could be in the region of 5%.

Which lenders are participating?

It is a commercial matter for the lenders to decide whether and on what terms they will participate. All the major lenders to the new build industry have indicated that they are supportive of the scheme. It is likely that there will be a number in place from the start of the scheme with further participation being phased in over the next few months.

What impact are you expecting the product to have on the market?

Until the full details of the product are in place that is difficult to predict but given that the major constraint on the market has been mortgage finance we do expect the impact to be positive. We expect to build more homes as a result of the scheme.

The early indications of interest are very strong – Barratt Developments has received, in total, around 20,000 preregistrations on its Barratt, David Wilson and Ward websites. That figure is increasing by 1500 per week.

Which housebuilders are included in the scheme?

Any house builder can be included in the scheme if they wish to be.

How will the scheme operate?

The Protected Cell Company will be managed by Jardine Lloyd Thompson (JLT) on behalf of the HBF and participating builders. JLT will also have responsibility for providing management information to government and CML. There will be a monitoring Group, including DCLG, JLT, CML and HBF which will be responsible for the ongoing assessment of the effectiveness of the scheme.

If a customer defaults on the mortgage are they still liable or does the insurance scheme protect them?

The insurance scheme is there to protect the lender and is paid for by the housebuilder with additional underwriting by the Government. The benefit for the customer is that they will be able to borrow higher loan to values at a lower interest charge than would otherwise be the case. However, it is important to understand that they remain liable for the full loan. Loans will only be available to customers with a good credit record who can prove affordability.