Schemes like the government’s Help to Buy and shared ownership were once trumpeted as the answer to falling homeownership in the UK. But, after a decade of Help to Buy, how well have these schemes really worked?
Help to Buy
Help to Buy is an equity loan scheme that allows first-time buyers to purchase a home with a 5% deposit. The loan portion of the scheme covers anything from 20-40% of the home’s value (depending on where you live) with the rest covered by a standard mortgage.
The idea behind the scheme is simple, by allowing for a smaller mortgage, it removes the need for a large deposit – one of the biggest barriers to entry for first-time buyers. Sounds pretty useful in theory, right? Let’s get into how well it works in practice.
Starting with the positives, the scheme has helped an estimated 200,000 people in the UK buy a home. And it’s also true that the loan portion of Help to Buy can allow first-time purchasers to access more competitive mortgage rates than they would otherwise be able to.
However, there are some downsides. Firstly, the amount buyers have to pay back isn’t fixed. The loan is based on a percentage of the home’s value, so there’s every possibility that buyers will have to pay back much more than they borrowed. On top of this, after the sixth year of repayment, the interest rate is tied to the Retail Price Index, plus 1%. This means that if interest rates increase, buyers could be faced with unmanageable fees.
You can make the argument that this is no different from many other loan agreements, but it’s hard to escape the feeling that it isn’t very helpful for buyers who are already struggling to afford a deposit.
The second glaring flaw in the scheme is that it only covers new-build homes. There are a couple of problems with this. One, the number of new-builds being built lags far behind demand. Two, it gives buyers little choice and they’re much more constrained by geography.
There’s also the spectre of negative equity. Many commentators fear Help to Buy is artificially inflating house prices and that the market could tank once the scheme ends, leaving buyers mired in negative equity.
Finally, let’s zoom out and look at things at the macro level for a moment. The House of Lords report on meeting housing demand was absolutely scathing about the scheme, even going so far as to state the £29bn spent on it has been ‘wasted’. The report goes on to say that the scheme does little more than ‘inflate prices by more than their subsidy value’ and that the money would have been better spent ‘increasing housing supply’.
It’s hard to argue with these points. Homeownership continues to fall across the UK and the age of first-time buyers is creeping up year on year. What’s more, the scheme has mostly been accessed by young people who would likely have bought anyway (with help from family) and hasn’t done enough to help those from middle-income or working-class backgrounds who currently find themselves locked out of property ownership.
We’ve dealt with help to buy, let’s take a look at shared ownership. Shared ownership is effectively a halfway house between renting and purchasing a property. It allows first-time buyers to take out a mortgage on a portion of a home between 25 and 75%, with the remainder being owned by a housing association (in most cases).
Once again, let’s begin with the positives. Like help to buy, shared ownership can provide a stepping stone out of renting and onto the property ladder. Buyers typically need a far smaller deposit for a shared ownership purchase (due to the smaller mortgage). And, even though the mortgage and rental payments can add up to more than a full mortgage, it’s still a relatively achievable route into homeownership.
Shared ownership also has a key advantage over renting, besides having a stake in the property. The portion of the home a buyer owns can increase if the value of the property goes up. This provides some equity to help homeowners take the next step on the property ladder.
Now for the snags in shared ownership.
Most obviously, buyers are still effectively tenants. This means paying rent on top of mortgage repayments, the possibility of eviction, and service charges for communal areas. Worst of all, buyers are not due any reimbursement of the money put into the property if they are evicted until the property is sold.
Then, there’s the leasehold issue. As we’re all aware, a leasehold property becomes progressively harder to sell and the value decreases rapidly the longer it’s owned. Of course, this can be avoided with a lease extension but that’s not always an option. Much like we discussed earlier with help to buy, this raises the threat of negative equity or an effectively worthless property.
Another issue is ‘staircasing’. This process allows tenants to buy more of the property over time, in smaller, more manageable chunks. It sounds great in theory, but it comes with some pitfalls. Staircasing requires the owner to save for multiple (albeit smaller) deposits and pay for searches, surveys and legal fees each time they want to up their share. This potentially makes it more expensive than the ‘one and done’ approach of a traditional mortgage.
Help to buy and shared ownership do represent an attempt to at least do something to help first-time buyers onto the ladder. However, it’s difficult not to conclude that both schemes are ineffectual alternatives to the complicated business of building more houses or tackling the huge number of empty properties.
Both schemes are riddled with flaws and pose little real value to most first-time buyers. Yes, it’s true that both do offer a way onto the property ladder, but it’s worth asking whether that’s worthwhile when they potentially create more problems for new homeowners than they solve.
Unfortunately, the dwindling numbers of first-time buyers is a systemic problem that requires a systemic fix. Schemes like Help to Buy might win votes or gloss over the issue for a while, but there’s no shortcut to fixing the affordable housing crisis.