The evolution of Help to Buy

The new regional Help to Buy price caps implemented from 1^st April will reduce the number of new homes eligible for Help to Buy nationally by a quarter. In Northern England, this figure will be closer to half of all new homes. The price caps have been set at 1.5x what the average first-time buyer paid in the region last year and mean Help to Buy cannot be used on any new home more expensive than this.

The new price caps will mean that 80% of four-bed and 90% of five-bed homes will be too expensive for Help to Buy. And at the same time as the caps being reduced, strong house price growth over the last year means that around 5,000 fewer new home sales each year will be eligible for Help to Buy than if the caps had been introduced a year ago. 

Naturally, the price caps cut out larger, more expensive homes. But given first-time buyers tend to purchase smaller and cheaper new homes, it means that the new caps are unlikely to make a significant difference to take-up rates. Rather, it may be the launch of the Mortgage Guarantee scheme which could tempt some buyers to look elsewhere.

With lenders still rationing higher loan-to-value mortgage products, the government aims to open up homeownership with the implementation of its 95% mortgage guarantee scheme which is likely to support around 100,000 sales. The new scheme which starts next month will mean for the first time since the onset of the pandemic, buyers with a 5% deposit will be able to choose whether or not to buy new. This may mean that some first-time buyers with small deposits who would have previously used the Help to Buy Equity Loan to purchase a new home, could instead turn to the new government-backed guarantee scheme.  

The numbers doing so will depend on how much confidence the guarantee gives lenders to broaden their criteria for those with a 5% deposit, alongside how competitive the rates on offer are. And specifically how close they are to Help to Buy products.

The early indications are that rates will be slightly above Help to Buy Equity Loan mortgages. With Help to Buy rates currently ranging from 2.5% to 3.0%, and a 95% loan-to-value (LTV) mortgage not backed by the new scheme priced at 3.99% (but only available on houses and not flats), rates on Mortgage Guarantee products are likely to be somewhere between the two.

For someone able to put down a 5% deposit on a typical property, this is likely to mean that the monthly cost of the mortgage on the Help to Buy Equity Loan scheme is around £350 cheaper than the Mortgage Guarantee (outside London) during the first five years. And once owners start paying interest on the Equity Loan in year six, this saving falls to around £100 per month. For many buyers these figures are likely to prove prohibitive, keeping the Equity Loan scheme as their only route to homeownership.

However, for higher-earning first-time buyers with small deposits, the Mortgage Guarantee should allow them to broaden their search so it includes second-hand options. Potentially this gives them the opportunity to buy a cheaper home and/or one which requires a degree of work. This will allow them to reduce what they spend initially, enabling them to add value over time as and when they can afford to.