Back in 2013, against a backdrop of tentative economic recovery driven by the property market, the government introduced an inspired home buyer’s scheme known as Help to Buy. It would encourage more people to market by giving first-time buyers a helping hand with the deposit or mortgage costs especially when rising prices and stringent affordability tests were locking many buyers out.
Under the Help to Buy Equity Loan, the government lends up to -20% of the purchase price (up to 40% in London) to help buyers to get on the housing ladder, especially helpful for those who are perhaps struggling to save a deposit.
The Help to Buy ISA scheme boosts savings by 25% to help towards a deposit and in addition, the Help to Buy Shared Ownership scheme allows people to buy a portion of their home if they can’t afford mortgage payments on the full amount. They pay rent on the share of the property that they don’t own and can buy greater shares when they are able to.
With so many options, first-time buyers are no longer finding the first rung of the property ladder out of reach and house builders are experiencing a welcome boost in demand.
In fact, figures from the Department for Communities and Local Government show that Help to Buy has been responsible for £17.7bn worth of properties; for between a third and a half of all new-build transactions; for 80% of purchases by first-time buyers; and for 14% of all new residential builds. More than 100,000 people have benefitted from taking out a Help to Buy loan in one form or other.
New builds are particularly attractive under the scheme because only a 5% deposit is needed. Legal and General Mortgage Club noted that between 35-40% of its new build sales were through the scheme. So news that Help to Buy is under review and that’s its future is uncertain has been greeted with concern from all corners.
For all its success, the scheme has drawn criticism. Some financial experts have commented that the three different elements – the Help to buy Equity Loan, the Help to Buy ISA and the Help to Buy Shared Ownership – make it unnecessarily confusing. Other market watchers have noted that in creating a swathe of first-time buyers, it has boosted demand beyond housing stock capacity and driven up house prices further.
Liberum analysts commented that many people are using the scheme “do not actually need it” and there is the worry that house builders are setting too much store by the scheme. According to Emma Haslett writing for City A.M., more than 50% of sales at Persimmon are Help to Buy, a figure that is 40% at Taylor Wimpey, Galliford Try and Redrow.
Further proof of house builders’ dependence on the scheme came in the form of a drop in share prices when an independent review by the London School of Economics was announced. Shares in Barratt, Taylor Wimpey and Persimmon fell by 5%, Bellway and Crest Nicholson fell 3.5% when it was rumoured that all options for the scheme’s future were being considered.
Once the Department for Communities and Local Government (DCLG) announced that the LSE evaluation was part of a regular review process, house builders recovered their share values. But it shows that Help to Buy has become a vital part of the property market, something that LSE will no doubt take into consideration.
Despite the initial panic, there is little likelihood that the scheme will finish before its scheduled 2021 end date. Some possibilities are that the scheme ends abruptly in 2021, or there is a tapering-off up to or after 2021, or the property price cap of £600,000 could simply be lowered and Help to Buy continues. In fact, new housing minister Alok Sharma commented: “We have committed £8.6bn for the scheme to 2021, ensuring it continues to support homebuyers and stimulate housing supply. We also recognise the need to create certainty for prospective homeowners and developers beyond 2021, so will work with the sector to consider the future of the scheme.” Home buyers and builders will await the LSE’s review with great interest.
If you would like advice on how to make the most of Help to Buy over the next four years then make an appointment to speak to the Visionary Finance team.