August 6, 2013 / 10:17 AM / 6 years ago

RPT-Fitch: UK help-to-buy scheme may aid banks, builders margins

Aug 6 (Reuters) - (The following statement was released by the rating agency)

The second phase of the UK government’s Help-To-Buy scheme will increase margins for home builders and may do the same for banks, while creating contingent liabilities for the sovereign, Fitch Ratings says. The scheme will probably push up house prices, but the likely impact on the number of new homes built is less clear.

Help-To-Buy’s aim is to enable customers with only a 5% deposit to buy a home by providing a government guarantee to the mortgage provider for up to a further 15% of the value. The risk for the banks should be less than a standard 95% loan-to-value (LTV) mortgage and depending on the mechanics of the scheme, may be closer to a standard 80% LTV product. Affordability tests imposed by the Mortgage Market Review will ensure that only applicants who can afford repayments are granted loans under the scheme. However, because this is a new scheme the banks may have an opportunity to widen the spread. The ability of banks to do this will partly depend on competitive forces and whether they can fully pass on any additional fees to the borrower.

It is not yet possible to gauge the likely take-up of the scheme, despite the willingness of most lenders to participate, as affordability tests may filter out a high proportion of applicants. Furthermore, the full details of the scheme, including the fee to be paid for the guarantee have not yet been disclosed.

The scheme, along with the initial phase that began in April, could have an impact on sovereign gross debt and its dynamics, particularly if there is strong pent-up demand as the tighter loan-to-value ratios that have prevailed since 2008 are relaxed. The guarantees under the second phase (estimated at GBP12bn by the Treasury) along with direct equity loans for home buyers under the first phase (GBP3.5bn allocated in the 2013 budget) are open ended and could potentially lead to higher contingent liabilities over the medium term. However, we do not currently view the scheme as a threat to the (AA+/Stable) sovereign rating.

For house builders the main benefit from the second phase of the scheme will come from rising house prices, rather than increased volumes. This is because selling a house for more than originally expected has no additional associated costs and therefore generates pure profit, whereas increasing volumes also increases variable costs.

Builders also might prefer to avoid sharply increasing construction because of the risk that they may not be able to sell the properties when they are completed in two years’ time. This risk is partially offset, however, by the government’s decision to run the scheme for three years, which could give building companies more confidence that demand will be there when construction is completed. While the scheme does not come with any requirements on home builders to increase construction, we do expect them to face political pressure to build more.

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