Bank of England say Help to Buy not needed

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The Bank's Mark Carney wrote to the Chancellor of the Exchequer, Philip Hammond, stating that "the closure of the scheme would be unlikely ... to affect significantly the provision of finance to prospective mortgagors".

In a context where mortgage lending is continuing to rise despite predictions of Brexit gloom, the Governor's comments are correct insofar as the withdrawal of the Help to Buy scheme wouldn't risk a slump in mortgage approvals.

However, the idea that the scheme is "not needed" is misleading, since it was launched expressly to help younger, less affluent people get a foot on the property ladder.

New peaks

Indeed, it's not needed only in the sense that the current housing market appears to be doing well enough without it.

In August, for example, gross mortgage lending rose by 15% compared to the year before, with £22.5 billion in loans being handed to homeowners.

This is the highest August sum since 2007, when lending stood at £33.6 billion. It's also 7% higher than the figure for this July, which itself saw totals remain stable compared to the previous month and the same month the year before.

What's more, this stability and growth is made to seem more impressive in light of how properties bought via the Help to Buy Mortgage Guarantee Scheme have decreased markedly.

In 2014, it was used to fund 70% of mortgage loans on properties requiring a deposit of less than 10%, whereas in the first three months of this year it accounted for only 25% of such mortgages.

This is why Mark Carney believes there's little economic danger in removing it, since mortgage lending has increased in parallel with the Help to Buy mortgage scheme being used less.

Supporting a new generation

Nonetheless, even though mortgage lending has increased, the Help to Buy Mortgage Guarantee Scheme isn't any less necessary for the kind of people it was supposedly launched to help.

Through it, the Government provide lenders (e.g. banks) with a guarantee on the mortgages they give to customers, promising to compensate them if their customers default on their repayments.

With such a guarantee, the lenders are then more prepared to offer mortgages to customers who can afford only a smaller deposit, which can be no lower than 5% and no higher than 20%.

Because it offers this reassurance to lenders, the Government have claimed that over 150,000 mortgages have been awarded under the scheme since its introduction in April 2013, although this figure also includes mortgages secured using the Help to Buy equity loan as well.

This 150,000 includes many people who would not have been able to afford to buy a house without the help the scheme offers.

It's therefore somewhat confusing that the BoE's Governor has declared that the scheme is no longer needed. This is all the moreso when the Government themselves had declared that its aim was to "support a new generation in realising the dream of home ownership", and not to stimulate the housing market.

Yet the housing market has been showing various signs of expansion recently, and its arguably because of this expansion that the proportion of mortgage lending assisted by the Help to Buy guarantee has decreased.

For example, during 2014 and 2015 there was significant growth in high loan-to-value (LTV) mortgage lending.

This is when a lender allows a customer to take out a mortgage with a smaller deposit, such as anything less than 10%. In August of 2014, for instance, there was a 51% leap in LTV lending over the previous month, to 11,300 mortgages.

Such an increase was put down largely to an increase in competition among banks and a corresponding willingness among them to squeeze their profit margins.

Yet the effect was to reduce the proportion of such loans being awarded to people who were using the Help to Buy guarantee scheme.

As such, it's not entirely accurate to say that the scheme isn't needed. Lenders may be awarding more high LTV mortgages, but that doesn't necessarily mean they're still going to buyers on lower incomes.

4.5 times income

In fact, because the Government introduced a loan-to-income (LTI) limit in June 2014 on who could use the Help to Buy guarantee scheme, it's no wonder that the use of the scheme has decreased over time.

They ruled that a borrower can receive a mortgage loan through the scheme only if the loan was less than 4.5 times the borrower's income.

This means that if someone wants to buy a house worth £250,000 with a 10% deposit of £25,000, then they must have an income of at least £50,000.

It almost goes without saying that £50,000 hardly puts someone in a lower-income, "striving" bracket. And even with a deposit of 20%, a prospective homebuyer would still need an income of at least £44,444.

This is comfortably above the projected UK average income for 2016/17 of £27,354.

To be more precise, it's £17,090 above the average UK income. It therefore becomes apparent that, if the Help to Buy guarantee scheme isn't needed, it's not because there aren't whole sections of the population in need of help to take that first step on the property ladder.

Remortgaging

Instead, it's not needed because, as Governor Carney points out, mortgage lending is doing just fine without it.

Yet as the most recent figures reveal, much of August's uptick in business can be put down to remortgaging.

Since the BoE cut interest rates to an historic low of 0.25% in early August, many pre-existing homeowners are taking advantage of this low to secure a new fixed rate loan on their home that offers better value for money.

According to one mortgage broker with SPF Private Clients, "Much of our business - as much as 70% - is remortgaging".

Once again, this shows, not that the Help to Buy guarantee scheme is not needed, but that it wouldn't be missed by banks and lenders.

It also suggests that much of the rise in mortgage lending is deceptive. That's because much of this rise isn't the product of new homes being bought, but rather of older mortgages being switched for those with lower interest rates.

This leaning towards remortgaging is made likelier by the fact that, even if it has recovered in recent months, house building in the UK still hasn't recovered [PDF] from the 2007/8 recession.

Because of this, house prices have continued to rise, with the current national average of £216,750 being 8% higher than the 2015 average.

As a result, people at the bottom of the property ladder are even less able than before to begin climbing it.

That's why it's not entirely helpful to say that the Help to Buy Mortgage Guarantee Scheme isn't needed, unless of course it was only ever intended to boost the economy.

With such a judgement, it looks as though the Chancellor won't renew it when it reaches its planned expiry date on December 31st.

This will be a shame, since even though its current LTI ruling may prevent those who need it most from actually using it, there's little doubt that their need exists.