Will it negatively affect those with small deposits?

A key element of former Prime Minister, David Cameron’s flagship housing policy, the Help to Buy scheme, is to be discontinued at the end of the year. In a letter to the Bank of England at the end of September, Chancellor Philip Hammond said the mortgage guarantee element of the scheme would not be extended beyond 2016.

It is no secret that Britain is in the grip of a housing crisis. Figures released in February this year showed that the average age of a first-home buyer is now 33 years, up from 31 in 2004-05. In fact, the proportion of younger people buying with a mortgage now stands at only 34%, compared to 54% in 2005. Meanwhile the number of private renters in the same 25-34 age bracket increased from 24% to 46% over the same period. It seems that young people are now much more likely to rent their home than own it.

So how much will the decision to end the Help to Buy scheme affect first time buyers’ ability to get on the property ladder? And will it dash the hopes of those with smaller deposits wanting to fulfil their dream of owning their own little piece of England?

The Help to Buy scheme is comprised of three elements;

• ISA
• Equity loan scheme
• Mortgage guarantee

Help to Buy: ISA

Under the ISA element of the scheme, the government will boost your savings towards your property purchase by 25%. For every £200 you save, the government will contribute £50, up to a maximum value of £3000.

Help to Buy: Equity Loan

With the equity loan element of the Help to Buy scheme, the government will lend you up to 20% of the cost of your newly built home, meaning you will only need a 5% cash deposit and a 75% mortgage to make up the rest. You will also be exempt from fees on the 20% loan for the first five years of owning your home.

Help to Buy: Mortgage guarantee

The mortgage guarantee works by offering lenders the option to purchase a guarantee on mortgage loans.

Because of this support, lenders taking part are more willing to offer home buyers higher loan-to-value (LTV) mortgages (80-95%), as their risk is reduced.

You will still be fully responsible for your mortgage repayments, so if you have a 5% deposit you will need to take out and pay back a 95% mortgage.

At the height of the market, many borrowers were granted large mortgages that they ultimately could not afford to repay, and in some cases people even borrowed 100% of the value of their homes. This left many trapped in a negative equity nightmare when property values declined and interest rates rose.

Following the 2008 market crash, lending institutions severely tightened the criteria on which they were willing to offer mortgages. This more responsible approach to lending was seen as a positive thing by many, however it did restrict the ability of first time buyers to get on the property ladder. In order to afford the average London house price of £512,000, a young couple had to find over £100,000 to fund the 20% deposit required by most lenders under their new criteria.

However after the Help to Buy Scheme was introduced in 2014, buyers who qualified could obtain a loan with as little as 5% deposit (being a much more achievable average figure of £25,700).

There were initial fears that the mortgage guarantee scheme would exacerbate the housing shortage problem faced by Britain as it would allow more people to purchase homes without providing any incentive to build new ones. Economists warned that this could lead to an unsustainable housing bubble by boosting demand for homes without raising supply.

Other parts of Help to Buy – the equity loan scheme and the ISA bank account – will continue to operate. The loan element of the scheme is less controversial because it can only be used on new homes, meaning it is at least linked to supply in some way. The ISA effectively gifts people who have already saved a deposit additional money, but it has been riddled with administrative issues so far because the bonus payment is not released to the solicitor until completion and so is not available for exchange of contracts.

Prior to the announcement of the closure of the mortgage guarantee element of Help to Buy, Mark Carney, Governor of the Bank of England, told the government that the discontinuance of the scheme would not affect those with small deposits.

According to a report in The Guardian, Mr Carney said, “Over the past year, use of the scheme has declined significantly. In [the first quarter of] 2016, loans in the scheme accounted for only 3% of total mortgage lending for house purchase and 25% of lending at [loan-to-value] LTV [more than 90%], compared to 6% and 70% respectively in 2014”.

“Although use of the scheme has fallen, total lending at high LTV has has not declined. Instead more high LTV has taken place outside the scheme, as the availability of high LTV has recovered from its crisis lows”, the Governor added.

However, Patrick Bamford of AmTrust International (Mortgage and Special Risks), which provides guarantees to mortgage lenders, told The Guardian that lending to customers with low deposits was not rising as quickly as the rest of the market. Mortgage lending is up 19% over the last four quarters but is only up 8% on LTVs between 90 and 95%, he said.

Critics of the government’s decision, fear that by ending the mortgage guarantee scheme, many first-home buyers will be back to square one, unable to save the required deposit due to high rental costs and stagnant wages.

Thankfully there are still a number of other government schemes available for first-time home buyers to help them get on their way to owning their first home.

Examples include:

• Shared ownership
• Rent to buy
• First steps London
• Starter Home Scheme

An experienced residential property expert can advise you on the advantages and disadvantages of each of the available schemes in your area.

Despite the end of the Help to Buy mortgage guarantee element, there are still several good options available to help first-time buyers get on the property ladder.

Saracens Solicitors is a multi-service law firm based opposite Marble Arch on the North side of Hyde Park in London. We have years of experience in residential property sales and purchases, both in London and throughout the rest of the UK. For more information, please call our office on 020 3588 3500.

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