The UK government’s current version of Help to Buy will significantly change this year. My assessment is that these changes could mean that mortgage costs increase by 80% for the people that find they longer qualify for Help to Buy. Not only will this have consequences for the individuals who planned to use the Help to buy Scheme, but it will also impact property developers.
So what are the changes? First, only those who are buying their first home will qualify for the help to buy equity loan and secondly price caps have been introduced which govern if a property will qualify.
Whilst the end of the Chancellor’s Stamp Duty Holiday in March has been widely covered, the changes to help to buy have received far less attention. And I am not sure why. The Stamp Duty Holiday has been the shot in the arm the market needed to keep the lights on. But help to buy has been the keystone to the housing ecosystem which has maintained housing delivery for the last 5 years or more.
The thinking behind the change is presumably in part down to research undertaken by the National Audit Office (June 2019). Which found of the 211,000 purchasers who used help to buy since it launched, about 60% could have purchased a property without the scheme.
The problem is now the world looks dramatically different, 18 months on. Let me explain why.
First, I’ll consider those people who are using the scheme. Many were not first-time buyers and some presumably had larger incomes. However, only 4% were estimated to have household incomes of more than £100,000 p.a. As an example, I’ll take a household with two people working full time, each earning the average London wage of £40,464 (Glassdoor). Their combined household income would be £80,928 (£62,314 after tax and national insurance).
So how would the equation look for this couple both before and after Help to Buy (assuming they now no longer qualified)? Between them they have a monthly income after tax of £5,192. Say, with savings and leveraging the bank of ‘Mum and Dad’ they can assemble £50,000 as a deposit and are considering purchasing a £450,000 one-bedroom apartment in London.
Scenario 1 – mortgage costs with Help to Buy
With the benefit of a help to buy equity loan the couple would have the ability to borrow 40% (£180,000) for £12 per annum. Assuming, the remaining £220,000 was borrowed at 1.5% on a 25-year mortgage, their total monthly mortgage cost would be around £880 per month.
Scenario 2 – mortgage costs without Help to Buy
However, if the same couple were excluded from the help to buy scheme and had to borrow the full £400,000 on the same terms, the numbers look very different. Their monthly mortgage cost will almost double (80%) to £1,600 per month.
In the past, with rental costs broadly equivalent to the cost of a mortgage and the prospect of a rising market, logic would suggest that our fictional couple would still take the plunge and buy a property. But with the average deposit in London taking around 10 years for a single person to save and signs of economic trouble ahead, the financial scarring of lock downs and no doubt some moderation of rents – perhaps the same logic no longer applies?
The reality is that no one really knows what the impact of these changes to help to buy will be. However, it seems likely that given the fragile state of the economy there will be some impact. For developers this will mean it is more important than ever to have a clear strategy to sell their development and a clear sense of not only who their buyers are. But more importantly how they access them.