The future of the government’s flagship Help to Buy equity loan scheme remains in serious doubt ahead of next week’s Autumn Budget.
Between its launch in April 2013 and the end of March this year, just over 169,000 properties had been bought using Help to Buy equity loans, with eight in 10 of these going to first-time buyers.
But Help to Buy isn’t universally popular, with critics arguing that it has inflated the price of new-build homes and given financial help to those who don’t need it.
The scheme is due to close in 2021, but the government is yet to offer clarity on whether it intends to extend it – and many are expecting the Chancellor to use next week’s Budget to confirm his plans.
Here, we take a look at what could happen to Help to Buy in the Budget, and offer advice for prospective first-time buyers with small deposits.
Mortgage lenders demand Help to Buy clarity
With the Autumn Budget just seven days away, the debate over the future of Help to Buy continues, and industry figures are getting edgy.
The Intermediary Mortgage Lenders Association (IMLA) has urged the government to clarify the future of the scheme, having thrown its own weight behind an extension.
Kate Davies of the IMLA says: ‘Lenders and borrowers place heavy reliance on the scheme, and a major step change to arrangements would risk significant market disruption.
‘If changes to the scheme are being proposed, lenders will need appropriate notice in order to plan ahead.’
In September, a government spokesperson told Which?: ‘The government has committed to the scheme to March 2021 and recognises the need to create certainty for prospective homeowners and developers beyond this date.’
But could Help to Buy really be set for the scrapheap? Read on for three possible outcomes.
1. Help to Buy could be extended
The government could look to extend the scheme in its current form.
Who wants this and why?
Housebuilders: before the scheme was previously extended in 2017, their shares were dropping amid rumours that it would be scrapped. Once the scheme was extended, shares rose 2.6% in a day. Ultimately, Help to Buy provides a major profit boost for developers.
Thousands more first-time buyers will be able to use Help to Buy to purchase a property, and an extension would support the government’s aim to build hundreds of thousands of new homes.
Critics say that the scheme in its current form is inefficient. Around 6,700 buyers with household incomes of more than £100,000 have bought a property using Help to Buy, calling into question whether it’s helping those who need it the most.
Then there’s the question of price. New-build homes already attract a premium, and critics claim that Help to Buy inflates prices even further.
An extension in the short-term could provide the government with respite as it assesses long-term options (including the Starter Homes Initiative), but if the scheme was to continue in the same form, this may well have been announced by now.
2. The scheme could be restricted to those who can’t afford to buy on the open market
Who wants this and why?
First-time buyers who find that new-build homes are too expensive, even with the help of an equity loan.
Would offer a second chance to some first-time buyers with lower incomes, and a tapering would allow the government to appease critics without sacrificing housing targets.
In February 2016, the amount you can borrow through a Help to Buy equity loan (20% in England) was extended to 40% for those living in London, so stricter affordability rules would represent a significant change in policy. Tightening affordability could mean developers have to build cheaper homes, which could mean fewer being built.
A two-year extension with amended affordability rules could be a crowd-pleaser in next week’s budget, but with housing policy nothing is certain.
3. Help to Buy equity loans could be scrapped entirely
Who wants this and why?
Critics who want a bolder and more dynamic approach to improving affordability for first-time buyers.
Could theoretically result in some form of government assistance that isn’t dependent on expensive new-build homes.
Removes one of the main routes to homeownership for first-time buyers. Leaves the government with challenging housing targets and the need to find different ways of helping renters onto the property ladder.
While Help to Buy isn’t everyone’s cup of tea, it’s unlikely the government will scrap it completely unless there’s a replacement scheme waiting in the wings.
How do Help to Buy equity loans work?
In England, Help to Buy schemes involve the government offering a 20% (or 40% in London) equity loan on new-build properties priced up to £600,000.
This means first-time buyers and home movers can buy a property with a 5% deposit, and get a 75% (55% in London) mortgage to cover the remaining amount.
- Find out more in our full guide on Help to Buy equity loans.
Help to Buy alternatives
If you’ve saved a 5% deposit, there are a number of alternatives to Help to Buy.
95% mortgages have become increasingly competitive this year, with a growth in the number of lenders coming to the market.
One of the main benefits of a traditional mortgage is you’ll be able to buy an existing home (not just a new-build, as with Help to Buy) and you won’t have to worry about paying off an equity loan or paying interest five years down the line.
- Find out more: 95% mortgages
Shared ownership scheme
Shared ownership allows buyers to purchase a share of 25-75% in a property and pay rent on the rest.
It’s possible to ‘staircase’ to full ownership, but the combination of mortgage payments, rent and service charges can make these schemes very expensive.
- Find out more: shared ownership
Help from a family member
The ‘Bank of Mum and Dad’ remains popular with buyers hoping to get on to the ladder and, as well as gifted deposits, there are a range of mortgage products available for this purpose.
For example, parents who don’t have the cash to offer up front can consider joint or guarantor mortgages.
- Find out more: how parents can help first-time buyers
Advice on your mortgage options
If you’re looking to buy your first home and need advice on the best way of financing it, it can be helpful to speak to a whole-of-market mortgage broker.