May 29, 2014 / 9:48 AM / 4 years ago

UPDATE 2-UK's controversial Help to Buy mortgage plan has limited impact so far

(Updates throughout)

By Ana Nicolaci da Costa

LONDON, May 29 (Reuters) - Britain’s government said its mortgage guarantee programme has accounted for only a fraction of lending for home-buying, following criticism that the Help to Buy scheme was helping to fuel a housing bubble.

Figures showed 7,313 mortgages were taken out through the scheme in its first six months to March, or 1.3 percent of all mortgages issued during the period. Eighty percent of them went to first-time buyers, the programme’s target market.

“Help to Buy has been a success and house prices are still in real terms 13 percent below the peak they reached in 2007,” British Prime Minister David Cameron said. “This is a successful policy helping people get on the housing ladder.”

Critics of Help to Buy have said the programme looks designed to win support for the government ahead of elections in May 2015 and it adds to the risks of a house price bubble.

The Organisation for Economic Cooperation and Development recently suggested it should be scaled back.

Bank of England Governor Mark Carney has noted the potentially broader impact if Help to Buy encourages riskier mortgage lending by banks outside the programme.

“Like an iceberg, the part visible above water grossly understates its true size,” said Rob Wood, chief UK economist at Berenberg bank. He said the scheme encouraged one-way bets on the British housing market.

The government began providing guarantees for mortgages worth up to 95 percent of the value of a property in October in a bid to help people get on the property ladder.

Since then, house prices have accelerated and are up about 10 percent over the past 12 months.

Thursday’s data showed the programme was gathering speed from a slow start. Mortgage completions reached 2,657 in March, up from just four in October.

The value of mortgages supported by the scheme totalled just over 1 billion pounds ($1.7 billion) through the end of March.


The pick-up in house prices has fuelled speculation that the BoE could introduce new mortgage controls as soon as next month.

Among options on the table, it could recommend the government lowers the ceiling for properties qualifying for Help to Buy, which currently stands at 600,000 pounds.

However, the data showed most of the homes bought using a Help to Buy mortgage are worth a lot less than the ceiling, and few have been in London where prices are highest.

The finance ministry said the mean value of a property purchased or remortgaged through the scheme was 151,597 pounds, below a national average house price of 252,000. Just 5 percent of completions were for properties worth over 250,000 pounds.

Meanwhile, Britain’s financial services industry regulator said on Thursday that it was too early to tighten underwriting rules for home loans.

There are signs that the housing market is already losing some of its heat.

New tighter rules on mortgage lending seem to have dampened borrowing in recent months when mortgage approvals fell.

On Wednesday, UK lender Nationwide said London house prices may fall soon and a managing director at fund management firm PIMCO said British house prices were probably peaking.

The BoE has already refocused its Funding for Lending Scheme (FLS) away from mortgage lending and dedicated it exclusively to business lending.

The Bank said on Thursday that net lending for businesses by banks and building societies taking part in the FLS fell by 2.7 billion pounds in the first quarter of 2014.

The data showed net lending fell the most at Britain’s biggest retail bank Lloyds, which lent 2 billion pounds less to businesses during the period.

“The overall decline in our lending, as reported under the FLS, is the result of a fall in lending to multi-nationals, the nature of which is short term and which is increasingly being replaced with funding from the bond markets,” Lloyds said, adding that their lending to small and medium sized companies was growing.

$1 = 0.5986 British Pounds Additional reporting by David Milliken and Matt Scuffham; Editing by William Schomberg and Toby Chopra

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