As Mark Twain didn’t quite say, there are only three certain things in life: death, taxes and yet another government-backed bung for the housing market. The latest instalment is the 2021 to 2023 Help to Buy scheme, which carries on the theme of offering subsidised loans to first-time buyers – and only first-time buyers.
Here’s what is on offer—from April. Buyers can take out a loan of between five and 20 per cent of the purchase price of a new home (or up to 40 per cent in London). There is a cap on the property price on which the loans are available varies from region to region, ranging from £186,100 in the North East to £600,000 in London. First, the good news: there is no interest payable on the loan for the first five years – just a management fee of £1 a month, which ought not to be too much of a problem for most buyers.
But beware: this isn’t an ordinary loan, where the amount you owe stays flat until you pay it off. It is what is termed an ‘equity loan’, which rises (or shrinks) with the value of the property. If the value of your home rises 20 per cent in five years, so will the amount you owe. Keep your loan beyond year six and there will be interest to pay, too – and here’s where it gets fiendishly complex. In year six the interest rate will be 1.75 per cent. Thereafter, the interest rate rises in line with the Consumer Prices Index (CPI) plus 2 per cent. So, if CPI is 2.5 percent it means that your interest rate will rise by 4.5 per cent. But that’s not an extra 4.5 per cent of the value of the loan (if it was, we would very soon have a large number of very broke first-time buyers) – it is 4.5 per cent of the 1.75 per cent, ie about 0.08 per cent. Got that?
Who on Earth comes up with this stuff? If you don’t have a PhD in maths, here’s an illustration. If CPI remained at 2.5 per cent (the Bank of England’s target is to keep it at 2 per cent) you would be paying 1.83 per cent interest in year 6, 2.15 per cent in year 10 and 2.55 per cent in year 15. By year 25 – which would be when the loan expired – you would be paying 3.35 per cent, which could be either a steal or a bum deal, depending on what general interest rates were then.
My guess is that the constant ratcheting up of the interest rate is designed deliberately to irritate the homebuyer. It is a scheme devised with the intention that beneficiaries start to think about moving on after five years or so, at which point they would repay their equity loan. Moving up the housing ladder won’t be easy, however – in contrast to previous incarnations of Help to Buy, these equity loans are only available to first time buyers. Move house and you can’t carry the loan with you.
Will it help first time buyers? As with all these schemes, chucking bungs at the housing market has an inflationary effect – the more people are able to borrow, the more they are able to offer to buy a property. But at least with this scheme, it does help to boost the buying power of first-time buyers relative to their main competitors: buy-to-let investors. The Help to Buy scheme has always looked to be as much a leg-up for the housebuilding industry as for first-time buyers: the loans are only available on newly-built homes. If you are a first-time buyer, the market for new homes is substantially more accessible than the market for secondhand properties, which of course pleases the housebuilders no end.
But there is one very agreeable aspect to the latest Help to Buy scheme, and which does not favour the house builders so much: it has been designed to incentivise the switch away from leasehold. 'There are very few Help to Buy homes that will include a lease,' says the guide – suggesting that developers will only be able to take advantage of the scheme if they make their new apartment developments commonhold – where everyone owns a share of the building. Housebuilders responded to the first incarnation of the Help to Buy scheme by selling leasehold houses with onerous ground rents which doubled, in some cases, every 10 years. They will no longer be allowed to do that.
As a result, the impact of this latest Help to Buy scheme should be felt well beyond the population of first-time buyers.