While not everyone is familiar with the Help to Buy scheme offered by the government, those who are thinking of using it should be aware of the strict criteria applied to applications.
According to the latest reports, two major banks are rejecting as many as 50% of all those who apply for a mortgage under the terms of the scheme. The banks involved are the Lloyds Banking Group and Royal Bank of Scotland. The reason for rejection appears to be due to evaluating whether or not those applying could pay interest rates of 7%. Their deals are currently offered at just below 5%, but the banks are clearly keen not to sign people up for mortgages that could become unaffordable if rates were to go up by 2%.
Is this a sensible move?
It is certainly a cautious one. Part of the reason for the economic crisis in the first place was that people had taken on more debt than they could afford to pay back. With no safety cushion to fall back on, things very quickly fell apart for many people.
Clearly the banks are keen not to fall into the same situation again, with many homeowners becoming unable to pay their mortgages if the interest rate was to go up even just slightly. This is arguably an important point to consider for anyone wanting to apply for a Help to Buy mortgage. You may well be able to afford 4.99%, but what if the interest rates were to go up? How high could they go before you became unable to pay the mortgage each month?
Historically low interest rates
The interest rates are currently exceptionally low and they have been so for quite some time now. Logic and history both tell us this will not be the case forever. In fact there have been suggestions they could start to rise fairly soon, although this is by no means certain.
Lenders are credit scoring their applicants rigorously to ensure they can meet their strict standards. So it is not just a question of meeting the standards required to be able to pay back at the current interest rates, you must prove you would be able to afford to pay your mortgage at higher rates as well. This will probably be looked upon as frustrating for many people, but it also prevents them from getting into trouble in the future.
It is obviously wise not to try to borrow more than you can afford. The more you can put down as a deposit the more likely you are to be accepted for a smaller mortgage as well. It looks to be more difficult to get accepted for a 95% mortgage than it is for an 85% mortgage. However, getting together the necessary cash for the deposit is another problem entirely.
In any event the large volume of applications might look encouraging, but with challenging requirements to be met, the actual number of successful applications looks to be far less.