Help to Buy: price rises have extra sting in the tail for buyers using the scheme

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on HM government’s publication of Help to Buy loan data and quarterly statistics on the Help to Buy ISA, which show price rises have extra sting in the tail for buyers using the scheme.

Key points from publications:

21,026 homes were bought using Help to Buy loans between October and December 2020, up 40% from the same quarter a year earlier.
However, they failed to make up for lost sales earlier in the year: there were 49,714 sales under the scheme, down 5% from 2019.
The price of the average UK property rose almost £20,000 in 2020, and because loan repayments are based on price rises, it hiked the cost of borrowing.

Sarah Coles said:

“House prices are making life incredibly difficult for first time buyers, and they have an extra sting in the tail for buyers who use the Help to Buy loan scheme to overcome the hurdles.

“The speed of price rises means that many of those racing to save a deposit are running to stand still: their target percentage of the property price is still as far out of their reach as ever. The government’s promise to guarantee high loan-to-value loans has kickstarted that area of the market, but even if you can find a lender who is happy with your level of deposit, you need to find one who is prepared to accept your loan-to-income ratio too.

“Those who’ve used Help to Buy loans to overcome the hurdles are storing up a separate problem, because when the loan is eventually repaid to the government, the amount that needs to be paid back depends on the value of the house at that time. If you borrow 20% of the purchase price, you repay 20% of the value after five years, so when prices rise, so do your repayments.

“Someone who bought the average house in December 2014, borrowed 20% from the government, and repaid five years later, would pay around £2,000 less than someone who did the same a year later and had 2020s’s runaway house prices factored into the calculations.

“If prices fall from here, a separate fly crawls into the ointment, because after five years, when fees start becoming payable, many buyers remortgage onto a standard mortgage in order to repay the government. They take advantage of house price rises building the equity in their home in order to qualify for a normal mortgage. If prices don’t rise (or if they fall), the equity in their home won’t build as quickly, so they may struggle to find another lender to take them on – and could end up being stuck paying fees to the government.

“If you’re working hard to build a deposit, Help to Buy isn’t your only option. If you’re aged 18-39, and you plan to buy your first property a year or more down the line, you could also consider saving at least some of the deposit in a Lifetime ISA. You can put £4,000 a year into a LISA and the government will immediately top it up by 25% – so you could get £1,000 a year from the government to help you onto the property ladder.”

Other Help to Buy equity loan statistics:

The average property purchased with a Help to Buy loan in the last three months of 2020 cost £320,741. The average bought by first time buyers through the scheme in the same period was £311,635.
Overall, 313,043 homes have been bought using the scheme since it was launched in April 2013. The government loans have been worth £18.9 billion.
So far, 82% of those using the scheme have been first time buyers.
Almost a third of all properties bought through the scheme have been detached (32%) and a third semi-detached (32). Just a fifth have been flats (18%).

Help to Buy ISA statistics:

Overall, 386,728 homes have been bought using the scheme, and 508,492 bonuses have been paid – with an average bonus value of £1,051.
The average property bought through the scheme cost £174,531 compared to an average first-time buyer house price of £210,727 and a national average house price of £251,500.
The average age of a first-time buyer in the scheme is 28 compared to an overall first-time buyer average age of 30.

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay