As the five-year anniversary of the help-to-buy scheme rolls around, I want to explore the repercussions of these deals, and if they are still a good option for first-time buyers with low deposits.
One glaring repercussion is that homeowners who enrolled on a help-to-buy scheme five years ago are now faced with the prospect of a 1.75% payment to the government kicking in. This 1.75% also increases by RPI +1%, which at current levels means an increase of 5% each year.
We can look more closely at this by reviewing help-to-buy schemes in two areas of the country.
First London, where the help-to-buy loan available was 40%, and where house prices have increased significantly. The second is Yorkshire and the Humber, one of the largest areas in the UK, and where property inflation has remained much more level when compared to other regions.
In London, the 40% help-to-buy scheme was only introduced back in 2016. So, in the interests of predicting where people might be in five years, and comparing this to schemes across the country, I have considered the numbers assuming the loan was available three years prior in 2013. Our aim here is to understand what options those first-time London buyers might have in line with the nationwide statistics, and where the advantages or disadvantages lie as a result.
Breaking Down the Issues with Help-to-Buy
There are a number of ways to look at help-to-buy loans once a five-year deal comes to the end of its fixed period, depending on the options available to you. You could either:
- go onto the variable rate
- look to sell and move house
- take a new deal with the current lender, or
- remortgage elsewhere.
However, what’s alarming is that whilst new-build house prices have risen over the past few years – in London by an astonishing 50%, and 40% in Yorkshire – wage inflation over the same period has only increased by a mere 10%.
So, with inflation running at 4%, this means that property values have soared at a far greater pace than basic earnings. Money must go further as food, fuel and other costs rise and eat up a bigger part of people’s budgets.
The key questions to keep in mind are, can people afford to remortgage away from the help-to-buy scheme? Will they be able to afford the loan repayments on top of existing mortgages, and will they have the equity available to sell and move home?
If the answer to these questions is likely no, what will the repercussions be and will this lead to problems down the line? Does the help-to-buy scheme still look like a good option for people with low deposits considering where it might leave them in the future?
Working the Numbers
Looking at these two examples, we can work through the numbers.
For this comparison, we have assumed average new build prices, and a minimum deposit of just 5%. The typical five-year fixed rate available in 2013 was 3.47%, and mortgage balances now are calculated on this rate, assuming a 25-year repayment mortgage:
|London||Yorkshire & Humber|
|2013 House price||£350,000||£150,000|
|2018 House price||£525,000||£210,000|
|2018 Equity Loan||£210,000||£42,000|
|2018 Mortgage required to replace all||£376,000||£97,000|
|Annual repayment to HTB after 5 yrs||£3,675||£735|
|Monthly repayment to HTB after 5 yrs||£306.25||£61.25|
1. Moving on to the variable rate:
Straight away, there are a couple of figures that stand out. The total borrowing required to move away from help-to-buy products is a huge jump. For instance, if you got a five-year deal in London five years ago, you have gone from needing £192,000 to £376,000 to cover your mortgage requirements.
Given that in this period wages have only increased by 10%, and that according to Nationwide the amount of someone’s disposable income they are lending against has dropped from 65% to 62%, it seems very unlikely that the vast majority are going to be able to justify these increased mortgage figures when the help-to-buy fixed-term comes to an end.
Of course, some people might now be earning the level required, such as lawyers and doctors, where they might have been on fast-track or graduate schemes. However, most people are going to find this unfeasible.
2. Selling and moving:
If we look at the prospect of selling and moving on post help-to-buy loan, we now need to factor in stamp duty, which has to come from the deposit available. The repayment of the equity loan means that people on help-to-buy schemes are essentially losing 40% of the growth in equity of the property.
Whilst they are still in a better position than they were five years ago, the question is, assuming they wish to move from a flat to a house, will the deposit less stamp duty allow them to do so without a vast increase in mortgage costs? Taking a look at the figures, assuming a £600,000 property in London and a deposit after stamp duty, this means a £500,000 mortgage might be required, again vastly more expensive than the mortgage taken five years ago.
3. Remortgaging vs. taking a new deal:
Remortgaging without repaying the equity loan presents its own problems. Firstly, the number of lenders offering these deals is very small. Running a standard online search results in around 580 five-year fixed deals. Selecting only help-to-buy lenders reduces this to around 30 products.
Many lenders will offer clients retention deals, allowing them to stay with the same lender. However, these are often not as competitive as new a mortgage lender would offer, and going onto a standard variable rate can be extremely expensive, with average rates between four and five percent.
Looking at the numbers in Yorkshire and the Humber, the main difference is that the increase in loan required is still more than wage inflation, but not nearly as significant as we see in London. Also, with house prices remaining more stable, and stock being much more available in the North, the prospect of moving house at the end of the five years seems more feasible. Ultimately, because clients will have started with larger mortgages relative to the value of the home, they won’t get such a significant shock when they come to reassess.
What’s the Answer?
I’ve generally never recommended help-to-buy as being the golden ticket, and anticipated that it was only going to push the problem further down the line. One thing economists did not foresee was the impact of Brexit and the effect it is having on the economy as a whole. Things are getting more expensive and it’s likely this will continue after Brexit. At the same time, wages are stagnant and the money in people’s pockets is not increasing, with a rise in household debt becoming a concern as a result.
Given this problematic set of circumstances, it is uncertain how will people cope in the coming years when another bill, potentially £60 a month to an eye-watering £306 extra a month in London, bites. We recommend anyone on one of these help-to-buy schemes to get in touch with a broker, and discuss the relevant figures to gain an understanding of your options now and in the future.
If the five-year period is still some way off there is an option to begin repayment of the equity loan in advance. Doing so may make remortgaging or moving house much more achievable down the line. For those in London, a big advantage might be seen by moving out to cheaper parts of the country where that uplift in value, albeit only 60% of it, can really make a difference in terms of deposit and maintaining a reasonable mortgage balance.
If you are considering entering in to the help-to-buy scheme in the future, looking at these numbers might be sobering. Not only do new-build properties often get sold at a premium to begin with, house builders regularly enlist their own brokers to advise on mortgages. These brokers are essentially in the pay of the developers, relying on them to supply leads. Therefore, it is very unlikely they would present an unbiased view on the longer-term implications of new-build help-to-buy arrangements. As such, anyone considering such a deal should seek independent advice separate from the developers’ chosen broker so they know they are being supplied with the full picture.
People should be realistic about their earnings as they plan for the future of their deal, and budget from the outset for repayments not only on the mortgage but also on the equity loan. Most importantly, you would need to consider the effect of rising interest rates as well as rising inflation. If both move far quicker than wage growth, a point will be reached where help-to-buy arrangements will become unsustainable.