Help to buy financial trap for borrowers
By Pat Turnbull
In 2021, London Tenants Federation, the London Federation of Housing Cooperatives and the National Federation of Tenant Management Organisations published the London Tenants’ Manifesto. It argued for ‘a return to large scale publicly funded provision of good quality social rented homes, where people can comfortably raise their families and from which household members can play an active role in their communities’. Instead: ‘Public subsidy has been increasingly levered in to prop up a failing housing market through schemes such as Help to Buy, Starter and First Homes as well as shared ownership’. (1)
HELP TO BUY
One of these schemes, Help to Buy, ended on March 31st this year. Started by then Chancellor George Osborne a little over a decade ago, it granted 375,654 interest-free equity loans to buy new-build properties, according to figures which cover until the end of September 2022. First-time buyers accounted for 84% of the uptake and on average they borrowed £63,000 on a typical purchase price of £273,500. A total value of £23.6 billion was lent out. George Osborne argues that it has ‘helped hundreds of thousands of families buy their own home and supported thousands of construction jobs’.
However, readers will note that in many parts of the country £273,500 would not buy a garret. £23.6 billion could have built quite a few council houses. A report in January 2022 by the House of Lords Built Environment Select Committee found the loans inflated prices by more than their subsidy value in areas where it was needed most, concluding that ‘this funding would be better spent on increasing housing supply’ directly, through local authority and housing association building projects.
PROBLEMS FOR BORROWERS
An investigation by consumer group Which? in 2020 found one in seven homes bought under the Help to Buy scheme lost value, trapping owners in unsellable properties. In a recent report for the Joseph Rowntree Foundation, Lloyd and Grayston say: ‘Rising costs disproportionately impact particular groups of owners and those who have recently bought through Help to Buy, especially those using larger equity loans in London. The result will be more homeowners who find themselves struggling with their mortgage costs but are unable to move easily to a more affordable home.’ (2)
Helen Crane in This is Money (1/6/21) outlined some of the problems Help to Buy owners face.
'Those who bought properties using the scheme years ago face paying back more than they initially borrowed on initially interest-free taxpayer loans, due to accelerating house prices and loan amounts being based on a stake in their home. House prices increased by more than 10% in the year to March 2021, according to the ONS (Office for National Statistics) figures, bumping up the value of the government's stake in homes bought with Help to Buy Equity Loans....In London, loans can be up to 40% t of the purchase price due to higher property values. But instead of loans being a set amount borrowed, as a mortgage would be, they are taken as a stake in the property - meaning that as a home rises in value, so too does the amount needing to eventually be repaid to the state. So if a borrower took 20% of their original deposit from the Government scheme, they would pay back 20% of what their house is worth today.
'If house prices go down, you have the opposite problem. You may pay back less or a similar amount to what you borrowed, but you won't have built up much equity in your home - meaning you could struggle to get your next mortgage and leave the Help to Buy scheme.
'[Interest on a Help to Buy loan] can quickly spiral. The interest rate starts at 1.75% in year six, and after that it rises in line with the Retail Price Index measure of inflation plus 1% each year. For someone who bought a £200,000 home with a 20% (£40,000) Help to Buy equity loan, they would pay just a £12 management fee each year in years one to five. But in year six that would rise to £712, and in year 10 to £896 - on top of mortgage payments. In London where buyers can borrow up to £240,000, the costs could be much higher.' (3)
This is all in the context of the Bank of England raising interest rates to their highest level for 14 years. Just under a third of households in England have a mortgage, according to the government’s English Housing Survey. The Bank of England says up to four million households face a higher monthly mortgage bill this year. ‘An estimated 356,000 mortgage borrowers could face difficulties with repayments by July next year, according to City watchdog the Financial Conduct Authority….An average two-year fixed deal, which was 2.29% in November 2021, is now 5.32% – potentially a difference of hundreds of pounds each month in repayments for a typical borrower.’ (4)
Virginia Walllis explained in The Guardian’s Ask the Experts column in December last year how this affects Help to Buy customers: ‘You are right that in year six of a help-to-buy loan the interest rate charged is a low 1.75% (years one to five are interest free) but from year seven, the interest rate charged on a help-to-buy loan goes up by the consumer prices index (CPI) plus 2% (as at April in any given year). As the April 2022 CPI rate is 7.8%, it would mean that, from year seven, the interest rate would increase by 9.8% to 1.92% and then by whatever CPI plus 2% is in future years.’ (5)
NOT THE ANSWER
The shortage of social rented housing – council housing as it used to be called before the housing associations were roped in as major providers – forces people who have got the deposit and can get a mortgage to buy. But millions aren’t in this position and thousands who are, stretch themselves to the limit. The 2008 crash was caused by unscrupulous lenders persuading people to take on mortgages they could not afford. Help to Buy and schemes like them are not the answer to the housing crisis.
(1) A positive future for social housing in London: The London Tenants’ manifesto, London Tenants Federation website, 19/1/21
(2) 10 years on, what did George Osborne’s Help to Buy scheme really achieve?, Phillip Inman, The Guardian, 31/3/23
(4) UK interest rates: what the rise means for you, Kevin Peachey, BBC, 23/3/23
(5) Should our savings go towards the help-to-buy loan or overpaying a new mortgage?, Virginia Wallis, The Guardian 5/12/22
