You are probably aware of or have seen news about the Government’s Help To Buy scheme. It’s an initiative designed to offer some sort of solution for those new to property ownership or for people that need a bit of assistance to make the jump up to their next home.
When you look at the maths, it’s easy to see why this help is needed. As of January 2017, the average house price was £218,255 and the average UK salary is currently around £27,000. Most lending sources offer upto four times salary for a single purchaser and two and half times for a joint application. Based on these figures, that’s a maximum mortgage of £108,000 and £135,000 respectively. Put another way, that’s a shortfall of £110,255 and £83,255 based on the average house price.
Let’s take a quick look at the three options currently available with the Help to Buy scheme:
- Help to Buy ISA - For first time buyers who are saving to buy their first home, the Government will boost your savings by 25%. So, for every £200 saved, they will receive a government bonus of £50 upto a maximum of £3,000 in bonuses.
- Shared Ownership - If buyers can’t quite afford the mortgage on 100% of a home, Shared Ownership offers them the chance to buy a share of the home (between 25% and 75% of the home’s value) and pay rent on the remaining share. Later on, they have the option to purchase larger shares or all of the property.
- Equity Loan - The Government lends buyers up to 20%* of the cost of the newly built home, so they’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. There are no charges on the 20% loan for the first five years and there is a maximum purchase price of £600,000.
*In London, to reflect the increased prices, the equity loan limit is 40%.
Whilst all parts of the scheme offer some help, there does seem to be some limitations. Taking the Help to Buy ISA first, if the maximum per ISA in bonuses is £3,000, then to reach this, £12,000 needs to be put in by the individual. The total ISA value is then £15,000 which is still a long way off the deposit required based on average house prices and average salary. What isn’t clear is if you can have more that one Help to Buy ISA. The website is states that no other cash ISA can be active in the same tax year but not clear on if it’s one Help to Buy ISA per year.
Moving on to the Shared Ownership option which is available to first time buyers, previous home owners and existing shared ownership owners looking to move. You’ll own a share of the property (between 25% and 75%) and then pay rent on the other share. Later on, you can increase your share of the property up to the maximum of 75%.
The property can be brand new or an existing shared ownership property either for sale through special resale schemes or from an a housing association. All shared ownership properties are leasehold.
Finally, there’s the Equity Loan which has been by far the most popular option. As previously mentioned, it is only available on new homes under £600,000 and a 5% deposit is required. One of the main advantages of the Equity Loan is that it’s available to those who have an existing property that they’ll be selling. The loan itself is ‘free’ for the first five years and then interest is charged at 1.75% increasing in line with the Retail Price Index each year thereafter.
So the questions are, is Help to Buy helping people to buy and what is the likely impact when these schemes will inevitably end?
The ISA does give a little ‘something for nothing’ for those that are dedicated savers, disciplined enough to be making the maximum contribution to get the maximum bonus. However, there are other ISA’s that are offering higher returns. The Help to Buy ISA does guarantee a return regardless of what the market does so it’s probably down to your attitude to investment and risk.
The Shared Ownership scheme for us is a very narrow market, very much inwardly focused on new and existing shared ownership property and not benefiting the wider housing market.
The Equity Loan, as previously mentioned, has been the most popular option. Figures published by the BBC*, show a total of 100,284 loans granted with the scheme. This equates to £17.7bn of property, £4.6bn worth of equity loans with an average purchase price of £229,608.
Interestingly, Equity Loans account for one in three new homes purchases. We think it’s a bit disconcerting that 30% of the new homes market required Government support. Take that away and you have transaction levels more associated with a full blown property recession.
Our summary is that the main challenge with the Help to Buy scheme is that it does very little to help the wider property market. As an industry, we’re still very much dependant on people moving from one property to the next, the classic ‘house chain’ situation. With Shared Ownership being about new homes and existing shared ownership property, and the Equity Loan being only available on new homes, the upward surge of ‘closed-chain’ buyers is just not being created.
Furthermore, with the Equity Loan, you’re not allowed to remortgage to clear the debt, therefore, you’re going to have to move and as you can only have the loan once, you’re likely to be buying a lower priced property. Any money saved for a deposit or equity accrued within the home will be spent clearing the equity loan and not put back into property market.