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Help To Buy – What is it and is it working for homebuyers?

Help to Buy scheme

6 Reasons why ‘Help to Buy’ isn’t the answer to Britain’s home-ownership crisis

Since the credit crunch and property market crash of 2008, the government has been trying to breathe life into Britain’s mortgage market. Some would say that the tightened criteria implemented by Britain’s banks and building societies are a necessary evil, a chronic shortage of affordable home loans is bad for prosperity, consumer confidence and the broader economy. The Help to Buy scheme was supposed to change all that.

What is the Help to Buy Scheme?

In simple terms, the UK government’s Help to Buy scheme lends homebuyers the funds required for a mortgage deposit. A growing number of people squeezed out of the market due to steeply rising house prices. A commensurate rise in rental rates has left many relatively affluent consumers unable to raise more than a 5% deposit. The government committed billions of pounds to get people on the first rung of the property ladder to make up the shortfall between the 5% deposit provided by homebuyers and the 10% to 20% required under toughened lending criteria.

So far, the government has subsidised home purchases to the tune of nearly £6 billion under the scheme, and this figure could reach £12 billion by the time the initiative draws to a close. In essence, the government will have a significant stake-holding in up to £130 billion worth of home loans – owed directly to the banks and building societies the taxpayer propped up back in 2008.

For a chosen few – around 40,000 – the Help to Buy scheme has been the only way to gain access to the over-heating UK property market. But for tens of thousands of others, who so far haven’t been eligible to participate, Help to Buy has been nothing but an annoyance. There are five distinct reasons why the government’s flagship homeownership initiative may not be worth all the expense and controversy after all.

1. It only helps those who already have money

Imagine you want to buy a home in a commuter belt town such as Stevenage. While this is by no means the most expensive area in the South East for a property, the average three-bedroom, a semi-detached home could cost you anything between £250,000 and £300,000. To qualify for Help to Buy, you will need to contribute – based on the lower figure of £250,000 – £12,500 towards the purchase. How many people have this sort of money lying around? To save such a sum, you’d need to put away £100 a month for ten years or so. How will you keep this sort of money when trying to pay rent and cover the cost of travelling throughout London?

For the most part, Help to Buy is helping people on the way above the average salary in Britain. Some would argue that these people don’t need significant help to get on the property ladder. The mean salary for people already helped by Help to Buy is £77,000, and 4% of people assisted under the scheme earned more than £100,000 at the time of completion. Help to Buy is a godsend, but if you’re an average earner trying to purchase your first home, the government’s initiative is probably of little use to you.

2. The scheme flies in the face of Bank of England initiatives

The Bank of England realised soon after the credit crunch began that unaffordable loans were at the heart of the international financial meltdown. Stated simply, people were buying houses they could ill afford, and they had been doing it for several years. To prevent such a crisis from happening again, the Bank of England introduced new, stricter rules on what constitutes ‘affordability’ during the mortgage application process.

High loan-to-value (LTV) mortgages that require less than a 10 per cent deposit were almost impossible to come by before Help to Buy was introduced. Shortly after the scheme had been operating in 2014, the number of LTV mortgages, to the total number of home loans in the UK, had risen from 2% to 5%. How can this be good for the economic stability of Britain?

3. The scheme helps drive up house prices

A chronic shortage of house building has gradually driven prices upwards, and this has priced average earners out of the market altogether. According to figures from the Office for National Statistics, house prices rose by an eye-watering 18% between March 2013 and September 2014. But during the same period, wages rose by just 1.5%. Not surprisingly, the sharp rise in property values coincided with the sudden growth in popularity of Help to Buy.

Giving UK people even more money to buy houses with, via Help to Buy, and not building sufficient new homes, is going to drive property values upwards. Indeed, there is already evidence to suggest that this has happened. The cost of the average 5% deposit rose by £1,500 at a time when the average salary rose by only 1.5%. Someone on an average salary of £25,000 who wants to buy a house in South East England is farther away from achieving that dream than they were before the inception of Help to Buy.

4. The Help to Buy scheme doesn’t help people living in the capital

Those most affected by Britain’s house price boom are Londoners. Such is the average price of a home in most parts of Central and Greater London; house buying is an impossible dream for the vast majority of local people. A decent three-bedroomed, detached home with drive and garage can be picked up in Newcastle for as little as £200,000. However, buy the equivalent property in London, and you’ll need to find closer to £2 million.

Unlike in other parts of the UK, ordinary house buyers are competing with super-rich property investors for houses and apartments for sale in London. Hundreds of properties in the capital lie empty simply because wealthy individuals and corporations from abroad want to get on board the British property gravy train. Home purchases using the government’s scheme are exceptionally rare in central London – accounting for just 5% of all Help to Buy assisted purchases thus far.

5. A fifth of loans granted are to people who already own another property

The central principle of the government’s Help to Buy scheme involved helping cash-strapped savers get their foot on the first rung of the property ladder. In theory, there is much to admire about the initiative, but in practice, it is the people with money who are reaping the rewards.

Rather than helping average earners in the UK’s property hotspots to become homeowners, it seems Help to Buy is being abused by people who already own a home. More than 8,000 people bought second homes under the initiative in 2013 – which was about a fifth of all the government loans issued.

6. Help to Buy makes property ownership more expensive or more affordable?

It is a little ironic that a house buying initiative intended to make property ownership more affordable can – in certain circumstances – make it more expensive. Although there is a five-year interest-free period, fees increase incrementally over time. There are also restrictions on the type of homes you can by, and the lenders you can use. And the more your home is worth, the more you’ll pay in Help to Buy fees.

If the government wants to help, tackling the average property price by subsidising the building of new homes might be a better, more sustainable approach to what is a growing problem in Britain.

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