A shade under 50, 000 homeowners have been assisted in their house purchase by the Coalition’s flagship Help to Buy scheme, with borrowers from London and the South East comprising the majority of those enlisted in the scheme.
A combined total of 10, 338 buyers, within the capital and its surrounding regions, have acquired an interest free loan for a new home, or taken advantage of the mortgage aid aspect which allows prospective buyers to purchase a home whilst only putting down a 5% deposit.
Here’s a review of the Help to Buy scheme:
Equity Loan scheme – Phase 1 of Help to Buy
- Along with a 5% deposit, prospective homebuyers can take out an equity loan, interest free for the first 5 years of the term, which is worth up to 20% of a newly constructed home.
- A mortgage is then taken out from a participating lender which covers the rest of the houses’ cost, with the majority of lenders offering specific Help to Buy mortgages.
- Following the completion of the 5 year interest free term, if the 20% loan is still not entirely paid off, a borrower will be charged 1.75% interest for the next year. This rate will then rise by 1% plus inflation for every year that the loan remains outstanding.
This loan is predominantly targeted at young families or professionals that wish to take their first step onto the property ladder and become a homeowner. Although second time home owners may also apply providing the purchase is not that of a second home or they own any other properties as a buy-to-let investment.
Mortgage Guarantee scheme – Phase 2 of Help to Buy
This controversial aspect of help to buy applies to any property, as opposed to only new homes. There are no conditions for eligibility, so a borrower can apply for a loan which could be worth a maximum of 95% of the property’s worth. However, the applicant cannot take out a loan which is more than 4.5 times their annual income and the home must:
- Have a purchase price of less that £600,000
- Not be a shared ownership or shared equity purchase
- Not be a second home
- Not be a buy-to-let investment
The government stands to be compensated via a guarantee, which allows them to recoup funds if a borrower defaults on a loan and the home is repossessed.
Affordable Housing on the increase
Of the two aspects of Help to Buy, that is the equity loan scheme and the mortgage guarantee phase, critics condemned the latter, stating it would drive prices within the capital to exorbitance, and in lieu of this raised clamour urging the government to create more affordable new housing to combat this perceived eventuality.
It appears these calls have been answered, as the number of homes built through the scheme virtually doubled from April to the end of June. This represents a record high since the financial crisis, and has led to George Osborne professing that Help to Buy is “working exactly as we intended”
“Help to Buy is also driving a big increase in house building in Britain, boosting the construction industry and increasing housing supply,” the chancellor added.
This affordable housing could be the reason, in accordance with critics’ forecasts, for the falling numbers of house buyers utilising the mortgage guarantee facet of Help to Buy from May to June. In addition, the average mortgage obtained through Help to Buy fell in June too. The qualms these critics have with the mortgage guarantee is that buyers have too much freedom in relation to their deposit size and as such can abuse the mortgage constraints enforced by lenders and indirectly send house prices through the roof.
To combat the inherent risks involved in phase 2 of Help to Buy, Lloyds introduced a cap of £150,000, from £500,000, on the amount loaned to first time buyers via Help to Buy. There are fears that if similar caps are announced by other participating lenders, Help to Buy will become less popular in the capital and South East, due to their inflated property prices.
Although the majority of borrowers taking out loans through Help to Buy were based in the South East, they comprised only 1% of house buyers in that region. Help to Buy borrowers made up greater proportions of mortgage lending in every other region of the UK, highlighting how unrealistic it is for a first time, low-income buyer to obtain a property in the South East of England, let alone the UK.
However, the 82% of mortgages obtained through Help to buy were by first time buyers, compared with just 31% on the nationwide mortgage market, suggests the Coalition’s goal of aiding first time buyers, across the UK, through their flagship scheme has been realised to some extent.
The MPC are due to meet later this month to discuss the merits and drawbacks of Help to Buy, and assess whether its continuation is societally beneficial.