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Help to Buy - helping buyers or inflating the market?

  1. 14 September 2018
  2. By Nick Perman

Help to Buy – the government’s flagship housing initiative to help first-time buyers get on to the property ladder – is rumoured to be facing an uncertain future.

The scheme was originally set to run until at least March 2021, with the government then making a decision on what to do with it afterwards. Now there has been speculation that it could be amended, extended or scrapped completely.

Launched in March 2013 by the Cameron-Osborne administration, Help to Buy has proven divisive,  with some singing its praises for helping many people to buy a home while others have criticised it for being too narrow in focus and for artificially increasing the value of new properties.

Here, we look at the pros and cons of Help to Buy and ask whether it has a future beyond 2021…

Helping people buy a home

The Help to Buy equity loan scheme has lived up to its name if official figures are anything to go by. Some 169,102 people used the scheme to buy a home between its launch date and the end of March 2018.

It enables people buying new build properties to borrow 20% of the house price from the government (or 40% in London), which supporters say helps those who would have been priced out of buying otherwise.

It also allows people to buy a home with a small deposit, with only 5%  needed and a 75% mortgage (or 55% in London) making up the rest.

Typically, first-time buyers struggle most with raising the necessary deposit, and Help to Buy – along with other low deposit initiatives – has helped to improve their chances of getting on the property ladder.

What’s more, those using the Help to Buy scheme aren’t charged loan fees for the first five years of owning their home – which means they only need to focus on the mortgage.

Although Help to Buy has mostly helped first-time buyers (eight in 10 homes from the scheme have been secured by this demographic), it’s also been used by upsizers and those with bigger incomes. Over 32,000 existing homeowners have used Help to Buy to trade up the housing ladder, with nearly a quarter of households using the scheme purchasing properties worth more than £350,000.

Some would argue this goes against the whole point of the scheme – to help first-time buyers and those on lower incomes to purchase a home. Others, however, would suggest that upsizing can be just as difficult as purchasing a first property and that all parts of the market should benefit from government assistance.

Boosting house prices to unaffordable levels

Critics say Help to Buy has merely helped to artificially increase house prices, making it more difficult than ever for first-time buyers to purchase a home. Think tank The Resolution Foundation has claimed that prices for new build homes have risen by more than £50,000 since Help to Buy came on the scene.

“Since early 2016, the growth in new-build prices has outpaced price growth for existing resold property, strongly suggesting that equity loans have enabled developers to set prices at higher levels than otherwise,” the report said.

However, the government insists Help to Buy doesn’t have a large enough market share to impact the wider housing market. While Help to Buy equity loan transactions now account for nearly a third of all new build sales, they remain less than 4% of overall housing sales, which the government argues means they have little bearing on house prices as a whole.

As well as inflating house prices, critics of the scheme also point to research suggesting that a fifth of all people taking out Help to Buy loans are using them to trade up. There has even been evidence of people on six-figure salaries making use of the government loan to purchase a property. More than 6,700 households with incomes of £100,000 or more, in fact, have utilised Help to Buy since March 2013.  

Will it be scrapped?

The scheme will last until March 2021 – in October 2017 it was given a cash boost to extend it to that date – but what happens after that is less clear.

There is talk the scheme could be jettisoned completely, while others suggest it will be allowed to continue but only targeted towards people with lower incomes.

A modified scheme, with different rules and possibly even a different name, could last until 2023 to prevent a sudden cut off in revenue streams for new home builders. The housebuilding industry is in favour of an extension to the scheme, and would like to see certainty and clarity over what the future holds for Help to Buy.

Given the number of second home buyers making use of the scheme, the government may also want to consider a specific initiative targeted at this demographic, rather than just focusing primarily on first-time buyers. A recent report by Lloyds Bank highlighted how many second steppers – those taking their second step on the property ladder – are relying on financial support from friends and family to make their next move. 

Equally, first-time buyers might feel neglected if Help to Buy is scrapped – although there are other avenues via which this group can get a foothold on the ladder. There is Shared Ownership, financial assistance from the Bank of Mum and Dad, the Help to Buy ISA and the Lifetime ISA – but all these have pros and cons as well.

There has also been an increase in recent years of lenders willing to offer 95% mortgages, which may lessen the need for schemes like the Help to Buy equity loan. Opting for a 95% mortgage rather than Help to Buy also gives a greater range of options, as you aren’t only restricted to new build homes but can purchase older properties too.

We recently asked whether Help to Buy is damaging the property market and previously looked at the problems now being faced by the early Help to Buy adopters.

It’s certainly a scheme that divides opinion considerably, and while many will be sad to see it go – if it is indeed scrapped – others may not mourn its loss too much.

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