Help to Buy: most users did not need help
Three-fifths of homebuyers who used the government's Help to Buy scheme could have bought a home without it, the Government's spending watchdog the National Audit Office has revealed today. We take a look at how far Help to Buy has helped, where it falls down and what the options are to help first time buyers get a foot on the ladder.
June 13, 2019
Help to Buy in Brief
The Help to Buy Equity Loan scheme means a home buyer is only required to find 5% of the property value as a deposit. The Government then lends them up to 20% of the value of a property (or up to 40% in London) in the form of an ‘equity loan’. The remaining balance is made up with a mortgage.
There’s no interest to pay on the equity loan for the first five years – but after that five year period interest of 1.75% is due (rising each year after that in line with the Retail Prices Index plus 1%).
It’s open to both first-timer buyers and homemovers – but you have to buy a new-build home. From April 2021, there will be lower caps on the price of property you can buy and only first-time buyers will be eligible.
When you come to sell your home or after 25 years, the Government will take back its 20% or 40% equity loan share.
Has Help to Buy helped?
Yes in that…
- it has increased home ownership
- it has increased housing supply, particularly for first-time buyers
- the National Audit Office (NAO) has reported a proportion of participants – 31% – could have afforded to buy a home without the government’s help
- 19% of the people who used the scheme were already homeowners
- 4% of the people who used the scheme had incomes above £100,000
- buyers who want to sell their property soon after they purchase might find they are in negative equity
- 5% of the first tranche of Help to Buy homeowners to pay interest on their equity loan have fallen into arrears
- the government money has also helped new build developers. The NAO said today that the scheme has supported five of the six largest developers to increase the number of properties they sell year on year, and therefore their profits.
- the NAO said the scheme has exposed the government to significant market risk if property values fall, as well as tying up a significant public financial capacity. The government would have invested £29 billion in the scheme by 2023.
The NAO’s findings are in line with our Annual HomeOwners Survey published this month. We found that two thirds of UK adults and 64% of renters think that the Help to Buy equity loan scheme is a good idea in terms of helping first-time buyers get on the ladder as it addresses the major hurdle of saving a deposit.
But one in six (17% of UK adults and 15% of renters) of our survey respondents think Help to Buy is a bad idea. The major criticisms are that the scheme inflates house prices and contributes to excessive house builder profits.
Speak to a fee-free mortgage broker today to find out what you can afford to borrow – with or without using Help to Buy
Help to build bigger houses
In their audit of Help to Buy, the NAO also found that buyers have been able to borrow more through the scheme, because they can take out a mortgage and an equity loan.
Buyers took out mortgages and equity loans that together were typically around four and a half times their annual income (increasing to over six times in London). In contrast, first-time buyers generally took out mortgages that were three and a half times their annual income over the same period.
The NAO said that the increased spending power of buyers using the scheme has meant developers building properties with more bedrooms.
A good return on investment?
“The government’s greatest challenge now is to wean the property market off the scheme with as little impact as possible on its ambition of creating 300,000 homes a year by 2021,” said Gareth Davies, Head of the NAO today.
Overall £11.7 billion has been distributed across 211,000 Help to Buy loans. This is estimated to rise to around £29 billion in cash terms by the close of the adjusted scheme in 2023. It’s at this point the Government will really know if the scheme has been a good use of taxpayers’ money.
Homeowners in arrears
In the meantime, the first Help to Buy homeowners have started paying back interest on their loan. This can add about £150-£200 to the cost of your monthly household outgoings. In December 2018, the number due to pay back interest accounted for around 7% of homeowners using the scheme.
But the NAO found that in February 2019 around 5% of homeowners were in arrears. In almost all cases, homeowners have fallen into arrears because processes to collect interest were not set up when the loan was issued, and they have not responded to contact from Target (the organisation administering the loans).
What happens when Help to Buy ends?
More people will have to turn to The Bank of Mum and Dad – already the the 12th biggest lender last year. Without the Bank of Mum and Dad more first time buyers will struggle even more to buy a home. Our 2019 Annual HomeOwners Survey, polled by YouGov, found more than three quarters (77%) of those renting homes in the UK would like to own their own home – that is 3.5 million aspiring to own. But 2 million (6 in 10) of them think they will never be able to. The majority of first time buyers quoted high property prices and struggling to save for a deposit as the biggest barriers.
When Help to Buy ends in 2023, those without the Bank of Mum and Dad may turn to Shared Ownership as a means of taking their first step onto the housing ladder. But it’s a complicated scheme. Our Survey found that less than half of UK adults (49%) and 46% of renters think Shared Ownership sounds like a good idea as an alternative to renting. A third (33% and 32% respectively) think it is a bad idea.
Fo those saving to buy outright and without a Bank of Mum and Dad to dip into, the Help to Buy ISA is still on offer until November, while the Lifetime ISA is also worth considering. See our guide Lifetime vs Help to Buy ISA.