Designed to get more homes built, and help renters escape their landlords for good, a new report has just revealed just how effective the Help to Buy equity loan scheme has really been.
At best, the report finds Help to Buy let people get a foot on the ladder at a discount.
At worst, it left some of them trapped in negative equity, pushed prices up for people who can’t use it and handed Government cash to the better off.
The National Audit office found more than 8,000 of the people who’ve used it had salaries above £100,000, while one person in 20 was left in arrears after buying.
Most of the people using the scheme (63%) would have been able to afford to buy without it, the NAO added.
Head of the NAO Gareth Davies said: “Help to Buy has increased home ownership and housing supply, particularly for first-time buyers.
“However, a proportion of participants could have afforded to buy a home without the Government’s help.
“The scheme has also exposed the Government to significant market risk if property values fall, as well as tying up a significant public financial capacity.”
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Others went further in their criticsm.
“It’s now beyond clear that rather than helping those who can’t afford to buy a home, Help to Buy has mainly been a subsidy for a housing bubble, benefiting property developers and existing homeowners,” said Fran Boait, executive director of Positive Money.
Overall £11.7 billion has been handed out across 211,000 Help to Buy loans, money the Government doesn’t expect to get back until the year 2031.
“Until we can observe its longer-term effects on the property market and whether the department has recovered its substantial investment, we cannot say whether the scheme has delivered value for money,” Davies said
How it works
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Launched on April 1, 2013 – and available until 2023 – help to buy is an “equity loan scheme”.
Under the scheme, the buyer is only required to find 5% of the property value as a deposit.
The Government then lends you up to 20% of the value of a property in the form of an ‘equity loan’. The remaining balance can then be topped up through a mortgage.
In London, where prices are higher, you can get up to 40% as an equity loan.
There’s no interest to pay on the equity loan for the first 5 years (although there’s a £1 a month management charge) after that interest of 1.75% kicks in rising each year after that by the increase (if any) in the Retail Prices Index (RPI) plus 1%.
It’s open to both first-timer buyers and homemovers – but is restricted to new-build homes. From April 2021 onwards only first-time buyers can apply.
When you come to sell your home, the Government will take back its 20% (or 40%) share. If you don’t sell, the money is due back after 25 years.
The idea with the help to buy equity loan is that, because you’re theoretically only borrowing 75% from the mortgage lender, payments will be lower than if you’d used a 95% mortgage.
Problems with help to buy equity loans
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The first concern is what happens after the initial period of reduced payments ends – when all of a sudden people have an extra amount of cash to find each month.
Then there are worries about what happens when it’s time to sell and the Government calls in its loans – leaving buyers with a far smaller deposit for their next home.
These are both problems that are heightened at a time when house prices aren’t rising quickly and could be disastrous if they fall.
The NAO estimates 5% of the people who bought in the first eleven months of the scheme in England now owe more than their home is worth.
Worse, as a percentage of your home’s value – rather than a fixed amount – if house prices rise you end up owing more money when it comes to selling. This limits your potential gains compared with a standard mortgage.
The next major concern is that not all lenders work with the help to buy equity loan schemes – meaning buyers might not be getting the best deal on the rest of their mortgage.
Others raise questions about what the scheme is doing to the housing market overall.
The NAO estimates buyer using the scheme pay less than 1% more than if they bought an equivalent property without it.
But while that number looks low, new-build homes tend to cost 15-20% more than the equivalent second-hand properties, putting people at risk of seeing their home’s value drop if they need to sell quickly.
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There are also questions about who is being helped.
The NAO found 19% of the people who used it were already homeowners, 4% of them had incomes above £100,000 and take up was low in less affordable areas.
And with a shortage of homes, there are also questions about whether the Government’s cash could be better used elsewhere.
So the question becomes, what next?
“There is less need for the scheme now that higher loan-to-value mortgages are more available, and the Department plans to end the scheme in 2023,” the NAO said.
“Nevertheless, there is concern across the housing sector that the end of the scheme will result in a drop in new developments and sales.”
The NAO recommended that the Goverment take a proper look at the impact of the scheme on the overall market – especially on the prices of new-build homes – and take a close look at the results before making any new plans.
Housing Minister Kit Malthouse said: “Help to Buy has been genuinely life changing for first-time buyers across the country, helping them secure their first step on the property ladder.”
He said the scheme has been “win-win” – supporting first time buyers, increasing home building and also set to make a profit for the public.
He said: “From 2021 the scheme will be extended and strengthened to make it exclusively for first-time buyers to support those who need it most.”
