As the government announce the end of the Help to Buy scheme, many young people are left with the uncertainty of how they will now get on the property ladder.
Theresa May’s government has separated itself from David Cameron further by deciding to end the controversial Help to Buy scheme.
Whether you love it or hate it by the end of 2016 it will be no more. The housing market is a hotly debated topic especially post Brexit, there are always conflicting opinions about whether there is a housing crisis or not. Some believe the house prices are slowing down while others are seeing no end to the house pricing boom.
Just 100 days after the United Kingdom’s decision to leave the European Union there has been a significant fall in mortgage approvals, but many believe that the effects have not been as disastrous as people once thought.
The market for first time buyers is already in decline and this news has led to fears it will continue to do so.
What is the Help to Buy scheme all about?
Help to Buy is a scheme that was set up by the government which helps people buy property with only a 5% deposit of the house or flat sale price. The government then lends up to 20% of the sale price and the remaining (up to 75%) is borrowed from a mortgage lender on a repayment basis.
There are two main elements to the scheme; the first is an equity loan and the second is mortgage guarantee. The equity loan is part of the scheme that the government provides through the Homes and Communities Agency (HCA).
Between the buyer and the equity loan-
- The 25% combined deposit is more attractive to mortgage lenders and will more likely secure a better mortgage deal.
- There is no interest rate to pay for the first five years.
- In year six, you are charged 1.75% which climbs at a rate of 1% of the figure plus any increase in inflation every year after that.
Mortgage guarantee is the arrangement that the government makes with the lender which promises any losses will be covered by them if the mortgage isn’t repaid. Although using the mortgage guarantee scheme helps you borrow a larger mortgage at a lower rate, the buyer will still be subject to the same checks as any other mortgage application to ensure the repayments are affordable.
The difference between the two parts is that the equity loan is restricted to new-build houses whereas the mortgage guarantee can be used on new-builds and existing houses. The scheme in general does exclude people who are looking to buy a second home or a property to rent out as they do not fit the target criteria.
Why was the scheme set up?
One main goal for the introduction of the scheme was to give a helping hand to first time buyers who are struggling to afford to buy a house. However, it isn’t necessarily restricted to first time buyers, as it encourages existing homeowners to use the scheme too but on purchasing new-build houses. The idea was to then boost the construction industry as the demand for more new-build houses would increase alongside the increase in buyers.
It has recently been reported that there has been a significant decrease in houses on the market, which is partly due to the low rates of construction. In the last year, 139,000 new houses were built in England however this doesn’t match the demand for 225,000 homes a year.
When is it due to end?
The government announced today that the Help to Buy scheme will close at the end of 2016. The announcement may have come as a shock for those who have relied on the scheme to get their foot on the ladder, however, according to the new Chancellor, Philip Hammond, it was always due to finish then.
Back in 2013, the scheme was first announced in Chancellor of the Exchequer George Osborne’s 2013 budget speech as “the biggest government intervention in the housing market since the Right to Buy scheme” of the 1980s.
Who has benefited from the scheme?
Many first time buyers, mainly young people will be affected by the ending of this scheme as many saw it as a much appreciated helping hand. The scheme boasts many success stories from families all over the country that suddenly are able to have their own home.
In the recent months when David Cameron resigned and the scheme was debated more heavily, many people took to Twitter to show their support for the scheme.
Quite sad that @David_Cameron is no longer PM. The help to buy scheme helped me purchase my first home and get on the ladder, thanks Mr C 👏
— Louise Shurey (@louiseshurey) July 13, 2016
— Lee Kennedy (@leekennedy23) June 24, 2016
Not everyone is upset about the decision and believe that this move from the new government is a good thing and something that needed to happen.
Philip Hammond ditches Osborne's help-to-buy homes scheme https://t.co/rvtKwTgfoA Have to agree with that
— Richard Murphy (@RichardJMurphy) September 29, 2016
Throughout the reign of the help to buy scheme, a total of 185,000 homes were bought which include more than 150,000 properties for first time buyers.
Although there is debate about how helpful the scheme actually is, whether it is useful for first time buyers or whether it has contributed to creating higher property prices.
Sam Dumitri, of the Adam Smith Institute said: ‘Help to Buy only served to make this problem [the housing crisis] worse, pushing up prices through cheap credit, while doing nothing to address the underlying housing shortage.’
However Labour councillor Tracy Millard opposes this view and said: ‘This backward move will just go on to increase the problems facing young people and prolong the wait for decent homes.’
How will you get on the property ladder now?
Despite the UK being in what the Telegraph describes a ‘fully-fledged housing crisis’ and the Help to Buy scheme being scrapped, all is not lost just yet. There are still ways for first time buyers to climb on that property ladder.
While the scheme is not being extended into 2017, some aspects are staying put. The equity loan scheme which lends up to 20% of the cost of your home will still be available and also the ISA bank account where the government gifts you with 25% of your savings.
Many people are panicking about this news and how they will afford houses in the future. Well known money saving expert Martin Lewis has tried to help explain to his followers that a panic is not necessary.
Many first time buyers panicked about Help to Buy mortgage guarantee ending, here's my video on what it really means. Feel free to share… pic.twitter.com/hH0ROdkIh1
— Martin Lewis (@MartinSLewis) September 30, 2016
There are of course alternatives to Help To Buy – for example, the NewBuy scheme where you again only need a 5% deposit for the house. But there are catches to this: it has to be a newly built house with builders that are taking part .
Another alternative is a shared ownership mortgage. These work by allowing first time buyers to buy between 25%-75% of the house and pay the remaining amount as rent. You will need a mortgage but similar to the Help to Buy scheme you can get one that usually only requires a 5% deposit of the property’s value. However many do not like the idea of not being able to fully own a house and are put off by this fact.
With the issue of housing being one of Theresa May’s priorities, there may be a new scheme for first time buyers on the horizon.
By Philippa Challis and Kennedy Grainger