With the Help To Buy scheme coming to an end on 31st March 2021 and with house prices very firmly on the rise again, the age old debate of getting First Time Buyers onto the housing ladder will start to rear its head again with a plethora of first time buyer mortgage advice. So we felt it was timely to look over what options are available, what has/hasn’t worked in the past, and what may be a solution going forward.
What was Help To Buy?
The Help To Buy scheme was aimed at First Time Buyers and Home Movers where you would qualify for a government equity loan of either 40% of the property value in London, or 20% outside of London, with no interest payable for the first 5 years, capped at a purchase price of £600,000, on the basis that you put in at least a 5% cash deposit yourself and could agree a mortgage for the remainder. After the first 5 years, charges are added to the loan.
It is also crucial to understand that this is an equity loan, so not like a mortgage or other type of loan. In a simple example, if you purchased a property for £100,000, with a 20% equity loan, if in 10 years’ time your property value doubled to £200,000 so does your loan. That would then equate to £40,000 vs the original £20,000 when you first purchased the property. While the equity loan section is penalty free, there are certain rules around when you can repay the loan and how. A full breakdown of how this scheme works can be found here. If you would like Help to Buy or first time buyer mortgage advice please speak to us.
How successful has the Help to Buy scheme been?
It has to be classified as a success by the amount of loans and property sold off the back of this scheme, which has been far more popular than forerunners of this type of thing.
Full details will be available later in the year, but from April 2013 (when the scheme started) to 31st March 2020 (the last set of Government figures available) a staggering 272,852 properties were sold using this scheme (of that 224,133 were first time buyers), which counted for £16.05 billion of equity loans and £73.28 billion worth of property. With another year’s figures to go on top of that, this will be the largest government property scheme ever. By virtue of that, it will also make the UK Government a significant stake holder in the property market.
Getting well over a quarter of a million people onto the housing market for the first time should be seen as a good thing, as it is something that arguably would not have happened otherwise. A note of caution should be struck as how will this scheme will be measured by history and what happens in the coming years.
Future implications of Help to Buy
Are people able to exit this scheme easily? Did it artificially inflate house prices, and specifically new homes? Did it lead to property developers building specifically for this scheme, and if so, what happens next? As we say, only time will tell and what happens with house prices will be such a large factor.
If house prices continue to rise (which there is every indication that will happen over the longer term) you could find that people with Help To Buy loans are priced out of moving, but stuck in their current home, or may not have the means to repay the loan at the end of the term and are forced to sell. This is one we are going to have to come back to in 20 odd years’ time to see how it played out.
Ultimately though, as long we see stable wage inflation any major downsides should be mitigated (as inflation decreases debt in real terms, so watch out for that in this post-Covid debt laden economy…) and buying is always better than renting. So for the majority they should see more upside than down, but also, there will be some people that get ‘trapped’ in this arrangement as life didn’t play out how they thought it would.
Are there Alternative schemes available?
Yes, there are many. There is the Shared Ownership scheme, a forerunner to Help To Buy, but instead of an equity loan, you buy a % of the property and rent the remainder. The idea is that you buy more of the property over time, so your rent reduces, or stops, as you buy the property outright. Far simpler in a practical sense than HTB. As these are run by local housing associations and have proved quite successful, they are set to continue for the time being.
Some property developers are offering their own version of Help To Buy. Mortgage lenders have been comfortable with this so far, so it is likely that will continue, but a close eye will have to be paid to any T&C’s as some developers don’t exactly have the best reputation in how they treat people. As with anything, some are great, some are not, so care needs to be taken when going down this path.
We have seen an emergence of private schemes with the knowledge that HTB is coming to an end. We were in fact quoted in a recent article on this subject which is worth a read here.
Richard Campo (Managing Director of Rose Capital) was quoted as saying “Some of these offerings look like a dysfunctional Tinder to me” as websites are popping up looking to match people with deposits/income required, to those who want to buy but aren’t quite in a position to do so themselves.
If you take the comments above on the long term concerns on HTB, that is just exacerbated here. Again, I am sure this will work well for some, but for others it could become very problematic, hence why this is likely to remain a very niche thing.
So we suggest if you’re looking for a first time buyer mortgage you seek first time buyer mortgage advice.
What does this all mean for the long term prospects of First Time Buyers?
Unfortunately, none of this is great news. If the Government is pulling back support, and developers build less ‘affordable’ homes than they have over the last 5-6 years, that could equal the draw bridge being drawn up for your average punter.
Month on month, new records are being set for property reaching their highest level and house building remains woefully low compared to what is needed. Not a recipe for success if you are looking to buy for the first time. Indeed the conversation has shifted in the mortgage world to not focusing on first time buyers so much, but for looking at ‘intergenerational mortgages’ which is something you will start to see more of.
It is very likely that you will see these types of arrangements coming into play from here:
- Children will start to buy the parents home as they get older and the equity acquired will pass down the generations that way. It is more tax efficient and easier to arrange than the ‘bank of mum and dad’ coming to the rescue.
- Parents will look to ‘co-own’ property with their children, using either their income if they are working (so a traditional guarantor style set up), or look to ‘cross charge’ the equity in their home to assist their children. So again, in a simple example, mum and dad own a property worth £1m with no mortgage, so rather than take out a loan against their home, a mortgage lender takes a ‘charge’ over this home, which then acts as a deposit for the children to buy. Say they buy at £500k, a charge of circa £125k will be placed on the parents’ home which gives the bank comfort to lend until the children are in a position to take on the loan in their own right.
- Cash or assets are placed with a bank, to then offer the children 95-100% mortgages. There are a few 100% mortgages still available on this basis. This can work well if the children have got a well paying job but not enough time to build up the deposit needed. The funds will sit on account with the mortgage lender until the children are able to take on the loan themselves.
Whichever way you look at it, without parental assistance it will be harder to buy going forward and the right first time buyer mortgage advice will be crucial. So perhaps a good incentive for those kids who don’t have family money behind them to go and work damn hard as many of us had too!
Trend of decreasing home ownership in the UK
This should also be taken in context of the wider trend of decreasing home ownership in the UK. The average age of a First Time Buyer is now 38, and while that has come down from just over 40 recently, it could well go back up again for the reasons outlined above. Research from the “Economic Research Council” showed that we do not fare well compared to our European counterparts.
How much will a post Brexit/post Covid world have an impact on this? That is maybe the one positive note, if you want to view it as such, as if we can control our population better, there is less strain on the housing stock. We have seen a lot of non-UK nationals leave over the last few years and some of the rhetoric from this Government has been quite distasteful to non-UK people living here, making it a much less desirable place to live/work/study. Also, how many jobs will be lost over time due to Brexit? It is most likely that while house prices only move up modestly over time due to this, if earnings are also down, we won’t quite be able to bridge the gap needed to making buying your own home a reality for the majority of people.
If you have any questions on the points raised here, would like first time buyer mortgage advice, or help with any mortgage goal that you may have, please do pick up with one of the team who would be delighted to help.