The Help to Buy scheme has proved divisive ever since it was first introduced by David Cameron and George Osborne in 2013 as one of the Coalition’s flagship housing policies.
It exists in many different forms – from Shared Ownership
to the Help to Buy equity loan and the Help to Buy ISA
to Armed Forces Help to Buy – and has been slightly altered and boosted by funding in the years since it launched.
The Help to Buy mortgage guarantee scheme
, however, closed in December 2016 as the number of commercial lenders offering 95% loan-to-value mortgage products rose and lessened the need for a specific initiative to help those looking to buy with small deposits.
Supporters say the Help to Buy scheme has helped people own a home who otherwise wouldn’t have been able to, but critics say the scheme in its various guises is ineffective and has actually helped to worsen the housing crisis by inflating demand dramatically while supply remains too low. This, in turn, has merely pushed house prices up further for those struggling to buy.
Something that is talked about much less, though, is the problems now faced by those who bought into the Help to Buy scheme in its early days, some five years ago now, and the situation they’re going through with regards to negative equity, mortgaging, selling and interest rates.
Slow house price growth leads to negative equity
While the Help to Buy scheme sells the dream of easy ownership, it doesn’t talk about the prospect of negative equity – which occurs when the total borrowing that is secured against a home is greater than its current market value.
However, research carried out by mortgage broker Private Finance at the end of last year found that some of the first users of the Help to Buy equity loan scheme now face repaying the finance lent to them while receiving no benefit from house price gains.
The research, which was based on 51 local authorities with 100 or more Help to Buy equity loan completions in every year of the scheme’s existence, highlighted that certain areas have seen scant house price growth in the past five years. This means that homeowners face the prospect of repaying equity loans which are larger than their capital gains.
What’s more, from this year, the first users of the scheme will begin to incur interest on their equity loans, which might in turn encourage them to move up the property ladder.
When it comes to selling, Help to Buy borrowers are liable to repay 20% of the property value rather than the original loan – which makes house price growth all the more important.
Regional differences play their part
Whether you are a Help to Buy winner or loser depends entirely on where you bought your home. As an example, according to Private Finance’s research, average house prices in Stockton-on-Tees in the North East only went up from £102,409 in April 2013 to £114,265 by the end of 2017, a rise of just 12%.
This house price growth is far less than the original average equity loan in 2013 of £26,679, a sum that would now be worth £29,767. Help to Buy homeowners in Stockton-on-Tees, then, would face repaying back a sum that is £17,911 more than the capital gains they’ve made on their home.
This shortfall is a frequent problem in northern locations where Help to Buy has been used extensively, in particular the North West, the North East and Yorkshire. The top 10 areas where the Help to Buy equity loan dwarfs capital gains also include County Durham, Rochdale, Wolverhampton, Chorley, Sunderland, Leeds and Stoke-on-Trent.
On the other hand, Greenwich in south-east London saw average prices rise from £221,852 to £357,710 between April 2013 and the end of 2017 – equivalent to a 61% rise. Even when applying the same rate of house price growth to the original average equity loan in the area - growing this from £27,082 to £43,666 - this still leaves the borrower with £92,192 in capital gains. In other words, the huge house price growth in Greenwich of £135,859 since April 2013 is comfortably outstripping the growth in the price of the repayment loan that needs to be paid upon selling.
The south of the country, as you might expect, has fared much better when it comes to high house price growth, with the ‘Help to Buy Class of 2013 winners’ found in locations such as Wokingham, Bristol, Dartford, Bedford, Colchester and Horsham.
In all these areas the average rate of house price growth has been 35% or higher (in most cases much, much higher), dwarfing the growth seen in the worst-performing local authorities.
When will interest start to be incurred?
The Help to Buy equity loan is interest-free for the first five years. After this, borrowers are charged a rate of 1.75%, with this rate slowly increasing year-on-year in line with the Retail Price Index (RPI) plus 1%. Interest payments are paid on top of mortgage repayments.
For the first users of the Help to Buy scheme, the five-year interest-free period is nearly coming to an end. The scheme started in April 2013, so the earliest adopters will start incurring interest on their equity loans in a few weeks.
Example of how the equity loan is repaid
If a Help to Buy borrower is selling their home, or the mortgage has been paid off, they must repay the equity loan (the money they borrowed from the government) and a share of any increase in the value of the property.
Here’s how it would work on a property purchased for £200,000 and sold for £250,000.
Rise in value – 25%
Equity loan repayment - £50,000 (£40,000 plus 25% profit)
Mortgage - £150,000 (minus capital repayments)
Share of home – at least £50,000.
Here, the remaining £50,000 (or more) could be used as a deposit on a home further up the ladder. The amount paid back depends on the market value of the home at the time, and part or all of the loan can be paid back whenever (however, the minimum part payment accepted is 50% of the total equity amount, which can’t be paid in smaller increments). What is owed will also depend on how much of the mortgage has been paid off.
Selling a Help to Buy home
The gains made from this will largely depend on where a Help to Buy borrower happens to reside. If they live in the south of England, there is a good chance that significant gains will be made even once the repayment loan has been factored in. Homeowners in the north, however, are at far greater risk of slipping into negative equity, hindered by slow or non-existent house price growth.
What’s more, there are a limited number of remortgaging options on offer from providers for Help to Buy owners reaching the end of their five-year interest-free period. In other words, those looking to remortgage to secure a more favourable deal could be thwarted by a severe lack of choice.
Critics will say negative equity was an inevitable consequence of the Help to Buy scheme, but supporters will point to those who have benefitted from large capital gains as a sign that Help to Buy doesn’t merely help people on the ladder for the first time, it also helps them move up it.
As the first adopters of the Help to Buy scheme are encouraged to move on before they start incurring interest on their loan, the problems surrounding the scheme may now start to receive more widespread coverage.