Budget 2013: property implications

On 20 March 2013 the 2013 Budget was presented and will be of particular interest to the real estate industry.

Equity loan and mortgage guarantee

The government announced a £5.4 billion package of financial support to support long term difficulties in the housing market. This included the launch of “Help to Buy”, which offers two new schemes:

Equity loan scheme
Mortgage guarantee

The schemes are aimed at helping those who want to get on, or move up, the housing ladder and will be available to home movers as well as first-time buyers, who are seeking to purchase residential properties in the United Kingdom. There are no income cap constraints.

The new initiatives are available to those who are able to meet the following criteria:

Meeting certain tests from lenders’ to ensure they can re-pay the mortgage, as well as passing their chosen lender’s credit and affordability checks.
On capital repayment mortgages, and not interest-only mortgages.
On properties that will be occupied by the individual or individuals taking out the mortgage and not available to home buyers purchasing through incorporated companies.

Equity loan scheme

The equity loan scheme will be available for three years from 1 April 2013. Home buyers purchasing properties in the UK will be able to access the loan scheme through participating house builders and HomeBuy agents. The scheme is subject to a requirement for home buyers to have a minimum 5% deposit and the value of the property that they are seeking to purchase must not exceed £600,000. In turn, the government will provide buyers with an equity loan of up to 20% of the value of a new build property. The loan is interest free for the first five years and from year six, a fee of 1.75% is payable on the equity loan, which rises annually by RPI inflation plus 1%. The equity loan can be repaid at any time within 25 years (or the terms of the mortgage), or on sale of the property.

Mortgage guarantee

The mortgage guarantee scheme will be available from January 2014 for three years, and will be available for those seeking to buy an existing property or a new build property. The aim of the new proposal is that lenders will be incentivised to offer a greater number of mortgages to home buyers with small deposits. However, it for lenders to decide whether or not they choose to offer applicants a guaranteed mortgage. The scheme will only be available to those buyers with deposits between 5% and 20%, and in line with the equity loan scheme, the value of the property that they are seeking to purchase must not exceed £600,000. Lenders will decide the level of interest. The government will not be guaranteeing a borrower’s mortgage payments but will provide lenders with the option to purchase a guarantee on the high loan-to-value portion of the mortgage, for which the government will charge a commercial fee.

In the event that a borrower’s property is repossessed, the government will cover a proportion of the losses suffered by lenders. The guarantee will be valid for up to seven years after the grant of the mortgage (evidence has shown that borrowers are unlikely to default after this time).

Further details of the mortgage guarantee scheme will be available later this year.

Right to Buy

The government will shortly introduce changes to the Right to Buy scheme under the Housing Act 1985 to enable more social housing tenants to benefit from home ownership. To encourage take up of the Right to Buy scheme, the government will:

Reduce the qualifying period from five years to three years before tenants become eligible for the scheme.
Increase the maximum discount cash cap in London from £75,000 to £100,000 from 25 March 2013.
Simplify the application process for both local authorities and prospective tenants.

These changes are expected to increase home ownership with the intention that additional receipts will be used to reduce housing debt and support the government’s commitment to replace every home sold under the scheme on a one for one basis with a new affordable home for rent.

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