Opinions of the Help to Buy equity loan scheme vary depending on who you ask. One of the 144,000 users of the scheme would no doubt be delighted with the idea. But critics say the project, like an iron lung, is artificially keeping much new-build lending alive and also fuels issues that worsen the housing crisis.
The equity loan scheme –introduced by former chancellor George Osborne five years ago – has proved to be “a roaring success”, according to many in the mortgage industry.
The figures speak for themselves. The loans have helped fund the purchase of more than 144,000 new-build properties. More than eight out of 10 of these properties have been bought by first-time buyers.
This equity loan scheme appears to go from strength to strength, with last year set to be the busiest on record. In total almost as many completions were made in the first three-quarters of the year as were made in the whole of 2016.
A robust new-build sector is important for the broker market. In the general mortgage lending market intermediaries introduce around 70 per cent of all home loans. In the new-build market, this figure rises to between 85 and 90 per cent, according to the Intermediary Mortgage Lenders Association.
Imla says this is partly due to the fact that many housebuilders refer buyers to an approved broker to arrange finance. But it is also a reflection of the fact that this is a complex market, where brokers clearly have scope to add value – for both borrowers and developers.
Tighter lending restrictions still apply on most new-build properties, longer lead times are needed on mortgage offers and many lenders will only want limited exposure on larger developments.
In addition, many borrowers will need assistance understanding and accessing assistance, though schemes like the Help to Buy equity loan and Help to Buy Isa.
Help to Buy is not the first Government-backed scheme aimed at reviving the new-build market. But this scheme has been more successful than many previous initiatives.
We don‘t want funding to suddenly disappear
Mortgage Advice Bureau’s new homes relationship manager, James Chidgey, says this success has been due to the fact that Help to Buy has been carefully targeted, with the majority going to first-time buyers. He says the scheme has helped created a “virtuous circle”, by providing meaningful financial help to those trying to get on the housing ladder.
Those using the scheme need to put down just a 5 per cent deposit if they are purchasing a qualifying new-build property. The Government provides a further loan for 20 per cent of the property’s value – or 40 per cent in London. No interest is due on the Government-backed portion of the loan for the first five years.
LendInvest’s director of development, Steve Larkin, adds that the scheme has been a “real benefit” for the property market. “It remains one of the only routes for people to get onto the property ladder in our current economic climate.”
This has helped stimulate demand, and encouraged housebuilders to press forward with new developments. It is perhaps no coincidence that the housing supply in the UK has increased for the last four consecutive years.
Recent figures from the Ministry for Housing, Communities and Local Government show that there were almost 220,000 net additional dwellings created last year – the lion’s share (84 per cent) of which were new-build properties. This was the first time since the financial crisis that this annual number has exceeded 200,000.
Help to Buy has also boosted lender confidence in the new-build sector, according to a recent report by Imla. Lenders have lent some £21bn on properties that have been part-funded through Help to Buy.
Imla said this renewed confidence had led to more competition and activity in this specialist part of the lending market.
Of course, the renewed confidence isn’t just down to Help to Buy. Imla executive director Kate Davies pointed out that structural changes in the new-build market itself have also encouraged more lending activity.
In recent years most new-build developments – outside London at least – have focused on new-build houses, rather than blocks of flats. Many lenders experienced heavy losses on mortgages provided on high-density apartment buildings following the financial crash. As a result, most still have stringent lending criteria on new-build flats.
Davies points out that some lenders have reduced maximum LTV limits for new-build property, but these are modest changes.
Help to Buy has helped plug this gap by providing an equity bridge between what the borrower can afford as a deposit and lenders’ more restrictive LTV limits.
But it is not all good news. There are now concerns that the new-build market is becoming too reliant on these Government-backed loans. The most immediate concern is what will happen if the Government does not renew or replace this scheme. Despite a further £10bn having been pledged in last autumn’s Budget, Help to Buy is due to expire in April 2021.
Davies says: “What we really don’t want is a cliff edge, when this funding suddenly disappears.” She said this would cause a significant contraction in new-build lending which could lead to wider problems in the housing market.
As Imla points out, the withdrawal of this support could depress the value of new homes, which in turn could reduce the value of homes already bought under the scheme – weakening lenders’, borrowers’, and the Government’s security.
It is clear the withdrawal of Help to Buy could have a severe effect on housebuilders. In August an independent report suggested that the Government could end the Help to Buy scheme early. This prompted a share price rout at several major housebuilders, including Barratt, Taylor Wimpey, and Persimmon.
In the end prices recovered when it was clear the Government was planning to invest more into Help to Buy, not pull it.
Chidgey says: “This is a more immediate problem than people might think. April 2021 is just three years away. Housebuilders need to know what Government plans ahead of this date, given the lead-in time for buying land, and developing appropriate properties.
“They may slow the rate of development if they are not confident that there will be sufficient demand from buyers.”
He says the new-build sector could start to see the effects of this uncertainty as early as this year, unless there is clearer guidance from the Government soon on what happens next to Help to Buy.
Many in the mortgage industry expect the Government will continue to give some form of financial support to the new-build sector post-2021.
But there are a number of options for how it might choose to do this. It may opt to add a further tranche of funding to keep Help to Buy running. Given the relative success of the scheme to date – and the fact the Government has said it plans to build 300,000 new homes a year by the mid-2020s – this may seem like the simplest option, particularly with Brexit approaching.
Prime Minister Theresa May has given a personal pledge to “fix the broken housing market”. It remains difficult to see how this can be achieved without some form of Government support going forward.
But there is clearly scope for the Government to change the terms of the current scheme, or replace it.
This could involve reducing the size of the equity loan available. Another option may be to rebalance the help given to those buying in the capital versus the rest of the country.
Davies says the Government will want to review how the scheme has worked to date before making adjustments. As she points out, this can be a delicate balancing act.
“There are a number of issues to consider, not least whether this financial support is distorting the market,” she says.
There is the danger than any financial assistance simply pushes up the price of new-build properties by the same margin – defeating the object of making housing more affordable for first-time buyers.
Davies says it is too early to give any definitive view on whether this is happening. “We need long-term data to really assess the impact of schemes like Help to Buy.”
We need long-term data to assess the impact of schemes like Help to Buy
Ideally, schemes like this need a five- to 10-year period to bed down, though Davies admits that this “can seem like a long time in Parliamentary terms”.
She adds: “The Government may also want to consider the effect of other housing market reforms, designed to help first-time buyers – such as the recent stamp duty changes.”
There are concerns in some quarters, however, that Help to Buy is already creating distortions in the market.
Figures published in August last year show that while the number of new homes being built has increased, the number of property transactions across the market has fallen. Historically these two figures have tended to move in line. Many are suggesting that Help to Buy is the reason for this divergence.
Savills director of residential research Lucian Cook says: “Half of this divergence is underpinned by Help to Buy. It has allowed housebuilders to maintain rates of sale when the secondary market has softened.”
But at the same time there has been “pent up” demand for new homes, particularly as the rates of construction fell sharply following the financial crisis and subsequent economic slowdown.
Others have pointed to other structural reasons for the longer-term slowdown in the second-hand market. These include the ageing population and the higher cost of moving, with rising prices have dragged more properties into higher stamp duty bands.
While much of the focus on the new-build market has centred on Help to Buy, this is not the only initiative designed to boost new-build housing in the UK.
Shared ownership schemes, discount market sale schemes and investment in starter homes (particularly for lower-paid public sector workers) may all have a part to play.
The Government has also announced widespread reviews of planning law and proposed initiatives to encourage more smaller housebuilders to enter this market.
This may be a particular boon for many smaller local brokers who can find they are effectively locked out of the recommendations made by the bigger housebuilders, who have tended to dominate Help to Buy sales.
New-build properties have always attracted a pricing premium compared with other similar second-hand properties. But there are concerns that this premium has increased in recent years.
A recent report from Imla said: “New-build valuations remains a live issue. It is accepted that there will be a new- build premium justified by the advantages that come from purchasing a new home, such as an NHBS guarantee and lower running costs. However, history shows this premium can also be the result of less sustainable factors, including builder incentives and Government support schemes.”
It has urged valuers to remain “vigilant” about this issue, to ensure that new-build property continues to provide long-term value for buyers.
For those buying property via Help to Buy there is an additional concern when it comes to this new-build “premium”.
The first cohort of buyers to use this scheme will shortly be coming to the end of the five-year period, and will soon be required to start paying interest on the Government equity loan, as well as the rest of their mortgage. With interest rates low, this hopefully won’t stretch too many borrowers. But if it could create affordability issues for some.
Those who cannot continue to meet their mortgage repayments need to be confident that prices have risen sufficiently to cover this premium, enabling them to sell more easily.
Chidgey says: “There are a lot of good-quality new-builds on the market these days that will provide long-term value for buyers over five, 10 or 20 years.”
Larkin adds: “When it comes to ensuring long-term value with a new-build the conventional rules apply. Buying in the right location with the right demographics, such as good transport links and schools is key.”
The future of Help to Buy is uncertain, and while the Government has not committed to renewing the scheme it has dropped a heavy hint that it could.
However, any like-for-like renewal would be a tacit Government admission that its much-trumpeted commitment to cracking affordability and the housing crisis is faltering, so Westminster may be keen to see an end to the scheme. With just three years to go, the topic is set to get hotter and hotter.