Record 12 months for Help to Buy: but price rises hold potential risk

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the publication of government’s Help to Buy and Help to Buy ISA data, showing record 12 months, but with a warning that price rises hold potential risk.

Key points from data:

In the year to the end of March, there were a record 55,649 homes bought using Help to Buy equity loans – taking it to a total of 328,506 since the scheme was launched in 2013.
15,341 homes were bought using Help to Buy loans between January and March 2021, up 61% from the same quarter a year earlier.
The price of the average UK property rose over £27,000 in the year to March 2021, and because loan repayments are based on price rises, it hiked the cost of Help to Buy loans.

Sarah Coles said:

“We’ve been snapping up Help to Buy loans in this year’s homebuying frenzy, and the 12 months to the end of March saw the highest number of loans on record. But while rising prices make this scheme particularly handy for those struggling to raise a bigger deposit, they also bring extra risks.

“Help to Buy equity loans provide an answer to the impossible question of how to buy in a rapidly rising property market. Most people who use them have a 5% deposit (54%), and the scheme stops them battling to raise a bigger percentage of the property price at a time when the average property rose more than £27,000 in a year.

“However, while Help to Buy loans offer a solution to those struggling to buy in a rising market, the way they work means the same rising market will have a sting in the tail for anyone who takes advantage. 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.

“If you borrowed 20% from the government to buy the average property in May 2015, and then you repaid the loan in May 2020, you’d have to pay back £5,318 more than you borrowed. The rising market in the past 12 months means that someone doing the same a year later would have had to repay £8,751 more than they borrowed – so the rising market cost them almost £3,500.*

“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. And through the LISA, this never needs to be paid back.”

Other Help to Buy equity loan statistics:

The total value of property bought using the scheme since launch has hit £91.1 billion, and the total value of the loans is £20.1 billion.
The average property purchased with a Help to Buy loan in the first three months of 2021 cost £277,264. The average bought by first time buyers through the scheme in the same period was £268,563.
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%). This is unchanged from the previous quarter.
The average household income of people using the scheme in the first three months of 2021 was £63,229.

Help to Buy ISA statistics:

Overall, 410,075 homes have been bought using the scheme, and 538,840 bonuses have been paid – with an average bonus value of £1,073.
The average property bought through the scheme is £175,010 compared to an average first-time buyer house price of £214,452 and a national average house price of £256,405.
The average age of a first-time buyer in the scheme is 28 compared to an overall first-time buyer average age of 30.

* If you bought the average property in May 2015 and borrowed 20%, you’d have to borrow £40,984. In May 2020 repaying 20% would cost £46,302, so an extra £5,318. If you bought a year later you’d have borrowed £42,174 and repaid £50,925, which is an extra £8,751. So the rising market would have cost you £3,433.

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay