Market Insight - December 2015
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London Calling - and the Answer Came!
The Special Help to Buy Scheme for the capital will make a big difference for first-timers

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T he new Help to Buy Scheme for Londoners announced in the Autumn Statement hopes to address the severe affordability problems in the capital. While the existing Help to Buy scheme offers those with at least a 5 per cent deposit a government loan of up to 20 per cent of the purchase price (up to £600,000), the London scheme doubles this to a 40 per cent loan.

It will come into effect early next year and should make a huge difference for first-time buyers of new homes in London where take up of the original Help to Buy scheme had been low. There is however the consideration that with larger sums it will be more challenging when the requirements to repay the loan come in after the five years.

The new scheme means that for a buyer in London the cost of servicing is just 58 per cent of the amount paid by a buyer with only a ten per cent deposit. But, as with all subsidies the long term effect is likely to be price rises as more buyers compete for the available stock at a notional 40 per cent discount.

The five year 40 per cent interest free loan will make a huge difference to initial affordability in the capital. Buyers still have to raise a deposit of at least 5 per cent but the combination of their own deposit and interest free loan means that they only have to finance a 55 per cent mortgage. That makes the monthly cost of servicing a loan in London lower even than someone buying a 35 per cent part share of a home under shared ownership.

Assuming a 90 per cent LTV loan, the table shows the deposit needed under each type of tenure/ ownership scheme and the monthly servicing cost at a mortgage rate of 2.91 per cent. The final two columns show the difference in each of these compared to a non-subsidised buyer.

Click to enlarge.
Click to enlarge.
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