Help to Buy scheme hit hard - Lloyds caps loans in response to threat of a Housing Bubble

The market-leading lender, Lloyds Banking Group, has significantly lowered the amount it will provide for first time buyers via the Help to Buy scheme. Making a significant statement, Lloyds Banking Group has capped its lending at £150,000 ñ a mammoth reduction of £350,000 marking a 70 per cent deficit.

Not only will the cap pose greater challenges for first time buyers in their attempts to begin scaling the property ladder, it could spark a domino effect causing other lenders to impose similar restrictions on savers, putting further pressure on the long term viability of the help to buy scheme.

The initial criticism directed at the Toriesí flagship housing policy was that interest rates offered by banks were too substantial, standing at 5%, given how low average earnings are in real term by comparison. Moreover, Osborneís initial decision to cap aid at £600,000, despite average house prices standing at £172,000 across the UK at the time, was perceived by some as agenda-driven and a blatant hoodwinking with a view to securing the middle-class vote. 

Lloydsí cap affects the first of the two phases entailed within Help to Buy, that of the equity loan scheme. This aspect affords prospective home buyers a 5-year interest free loan worth 20% of the property to be purchasedí value. As such, they can take out a mortgage for 75 per cent of the propertyís value.

However, as Lloydsí loans are capped at £150,000, the maximum value of a property that can be bought by a saver seeking to borrow from Lloyds would be £200,000. This significantly dampens young house-buyersí hopes of living within the capital, or in many places within the South East of the UK, where the average house price ranges from 350,000 to 400,000+.

Ray Boulger, of John Charcol, appeared dumbfounded by the gravity of Lloyds cap. He said: ìThe reduction in loan means that the purchase price is reduced to £200,000, because the maximum loan under the scheme is 75 per cent of the purchase price.

ìThe biggest impact will be on first-time buyers in London and the South East. I was surprised Lloyds made such a drastic change. What it will do is ensure that business that would have gone to Lloyds will now go elsewhere.î

This notion of Lloyds losing out on business to other, more cost-effective competitors could hold some weight, however, given the majority stranglehold Lloyds has on the market, and the stagnation which seemingly underpins consumer switching within the banking sector, Lloyds being outcompeted anytime soon seems a fanciful thought.

David Hollingworth, of London & Country Mortgages, said although Lloyds now seem a far less attractive option, he spoke with trepidation of the potential consequences of the banking giantís move.

David Hollingworth of London & Country Mortgages said: ìThis will remove the UKís largest mortgage lender as an option for a number of borrowers.

ìThere are other lender options though so it doesnít currently signal a need to panic, although when the largest take action like this it can provoke others to follow

Lloyds, appeared resolute on the matter.

ëWe have taken the decision to temporarily cap shared equity and shared ownership lending to £150,000í, a spokesperson for Lloyds said. ëThis is a prudent, short term change that reflects the fact that we currently hold around a 50 per cent share of this market and is a further step to focus our activity on supporting first time buyers who have limited options to get onto the ladder.

ëWe remain committed to supporting the affordable housing sector and new build market, recently extending our Help to Buy Mortgage Guarantee Scheme to allow applications for those with a 5 per cent deposit on new build properties.í

The Bank of England are due to weight up the merits and drawbacks of the Help to Buy scheme in September. The Bank itself has already implemented measures, in Aprilís Mortgage Market Review, which curtailed the amount lenders could dish out to struggling borrowers, in an attempt to reduce then spiralling levels of debt.

A similarly judicious stance could be taken in September when push comes to shove.