The government Help to Buy Scheme came to an end on New Year’s Eve. The scheme was first launched in 2013 as part of an initiative to help both first time buyers and people wishing to move home. It has been claimed the scheme is now redundant, and has caused house prices to rise due to an unsustainable demand for housing. The loan industry is unlikely to be affected, but there could very well be further changes to house prices and interest rates as a result of the changes.
The Council of Mortgage Lenders say the scheme has now fulfilled all of its needs. They say it is no longer necessary in helping first time buyers to get on the property ladder. Although, critics claim the Help to Buy Scheme may have in fact excluded more people from the market, as the unsustainable demand for housing may have led to a rise in house prices. These price rises have made it virtually impossible to save even a 5% deposit. However, it is difficult to confirm these views, and the extent to which they are true.
More than 100,000 people are expected to have benefited from the scheme since its launch in 2013. The scheme is made up of two parts – the equity loan, and the mortgage guarantee. In the first six months, more than 5,300 people signed up to the equity loan. The mortgage guarantee was far more popular and saw 6,000 people take out a mortgage in the first three months.
The former Labour housing minister, John Healey, has said “six years of failure on housing has meant the fewest homes built since 1923, wages not keeping up with house prices, and so-called ‘starter homes’ costing up to £450,000 – well out of reach for most young people on ordinary incomes.
Labours Redfern Review into the decline of home-ownership will report later this year – setting out the causes of the failure on home-ownership and suggesting areas of action.”
Which part of the Help to Buy Scheme has ended?
The Help to Buy Scheme is made up of two main features – the equity loan, and the mortgage guarantee. The equity loan will still remain available to new loans until 2020, while the mortgage guarantee has now ended.
The Help to Buy equity loans are available to all first time buyers, and people wishing to move home. Landlords intending to use the scheme on a buy-to-let basis are not permitted, as well as people wishing to use it to purchase a second home (even if your first home is outside of the UK). The scheme cannot also be used to purchase houses on a shared ownership basis. Also, only new build properties worth up to £600,000 can be bought using the Help to Buy equity loan.
With the equity loan, the borrower puts in 5% of the property value, while the government contribute up to 20% – giving a 25% deposit, and a 75% mortgage. The government loan of 20% is interest free for the first five years, then interest is charged at 1.75%. The interest rate increases by 1% plus inflation every year after this.
If the loan remains unpaid when the property is sold, the government will reclaim 20% of the property value. This means they could in effect, take back more than what the initial loan amount. This is because house prices are likely to have increased since the loan was first taken out.
The mortgage guarantee part of the Help to Buy scheme has ended, but what was it? Like the equity loan, borrowers contribute a 5% deposit for the mortgage. But in this instance, it is the bank who put forward the other 95%. The government help by offering the lenders an indemnity, which covers them for any loss – for example if the borrower is no longer able to repay the loan, or if the property is repossessed.
The mortgage guarantee is also offered to first time buyers and home owners wishing to move. Again, the mortgage guarantee is not available for landlords or second home owners. However unlike the equity loan, the mortgage guarantee applies to both new builds and existing homes.
One benefit of taking part in the Help to Buy mortgage guarantee, was the property solely belonged to the homeowner. Once the home was sold, the government and banks were not entitled to any of the money made from the property.
How does this affect me?
First time buyers and homeowners looking to take advantage of the scheme are unlikely to be affected by the changes, as most lenders offer 95% mortgages outside of the scheme anyway. More than 30 lenders offer mortgages with a deposit of as little as 5%. People who currently have a loan using the mortgage guarantee scheme, will be unaffected by the changes.
Long term loans will still be available from a number of providers, and high loan-to-value mortgages are likely to remain on the market despite the changes. Tenants living in Housing Association accommodation also have access to the Right to Buy scheme which can further help get onto the property ladder.