Barclays (LSE: BARC) (NYSE: BCS.US) announced that it will join the government’s controversial Help to Buy scheme this morning.
The decision means that all of the UK’s major banks and two-thirds of UK mortgage lenders have now agreed to join the scheme, although HSBC and Santander have yet to launch products.
The Help to Buy scheme enables buyers to purchase a house with only a 5% deposit, and have the government guarantee a further 15% of their mortgage for seven years. Mortgage lenders pay a fee of 0.9% of the original mortgage for this service, which effectively offers them the same protection they would normally enjoy with an 80% loan-to-value mortgage.
The first phase of the Help to Buy scheme applied only to new builds, but David Cameron’s decision earlier this month to bring forwards the second phase of the scheme, and make it available for existing properties, seems to have triggered Barclays’ decision to participate.
Will Help to Buy boost mortgage lending?
Widening the Help to Buy scheme is likely to trigger an increase in mortgage lending, judging from the feedback provided by housebuilders in their most recent quarterly updates.
At the start of July, Persimmon reported that it had received 1,124 Help to Buy reservations since the scheme’s launch in April, and said that its reservation rate, which was up by 12% on last year prior to the scheme’s launch, had risen to 30% above last year’s rate after Help to Buy mortgages became available.
Other housebuilders have reported similar trends, although critics of the scheme point out that it is likely to inflate house prices, making them even less affordable in the long term.
Is it good for Barclays?
The government has pledged that the Help to Buy scheme will only be in operation for three years, but unwinding such a scheme could be difficult without triggering a house price crash, something that no government is likely to do voluntarily. I suspect that Help to Buy may run for longer than three years.
From Barclays’ perspective, the risks of Help to Buy seem minimal, and the scheme seems likely to boost its low-risk retail banking profits. In return for a 0.9% fee, it should be able to increase both the volume and the value of its mortgage lending, while enjoying the protection offered by a 20% deposit.
