Help to Buy was riddled with problems – is the Government’s new scheme any better?

First-time buyers will be able to get on the property ladder with a deposit of just 2.5 per cent, thanks to an upcoming scheme, dubbed by some as ‘the new Help to Buy’. The initiative – Your First Home – will give eligible prospective buyers the ability to secure qualifying new build homes with a small down payment. “Too many young people are struggling with the cost of housing, with many giving up hope of ever having a home to call their own. So we will step in to help more first-time buyers on to the housing ladder,” said Prime Minister Andy Burnham, announcing the scheme in September. Your First Home will operate similarly to the old government Help to Buy equity loan scheme which closed three years ago. But years on, that scheme is not universally viewed as a success, with criticisms that it inflated property prices, primarily benefited developers, and wasn’t targeted at lower earners. Although Help to Buy and the Your First Home scheme have similar principles – using a government-backed equity loan to help boost first-time buyers’ deposits, and only allowing them to buy new builds – there are some subtle differences, that change who the scheme works for. Below, we look at some of these differences and whether they address the issues with the first scheme. Avoiding only helping the rich? One major difference with the new scheme compared with the old one, is how much someone can make while using it. The earnings cap for Your First Home for those living in the capital will be set at £140,000, with the cap for those outside London sitting at £110,000. This compares to no cap for sellers on the old scheme, which had a “limited impact” on social mobility, according to a major report by the Institute for Fiscal Studies this year. The think-tank said the old scheme mostly helped higher earners in areas where homes were cheaper. So does the income limit change that? The IFS said the proposed income caps were “relatively high” so were unlikely to fundamentally change who can benefit from the scheme. Will affordability be an issue? Savers using the new scheme can have a smaller deposit than with the old one – 2.5 per cent versus 5 per cent – and the maximum price of a home they can purchase is larger in some areas, up to £650,000 in London, compared with £600,000 under the old scheme. But there is a trade-off for some. Buyers in London get a much smaller deposit via an equity loan – 20 versus 40 per cent – meaning they have to borrow larger mortgages to use the scheme. On the old scheme, buyers in the capital only needed a mortgage on 55 per cent of their home. On the new one, they’ll need one on 77.5 per cent. Experts say some potential buyers may not be able to afford loans of this size on their incomes. Analysis by savings platform Tembo, that looked across 17 English cities, found 76 per cent of lower earners would need to borrow more than 4.5 times their income to get a mortgage using the scheme. Most mortgage lenders in the UK only allow you to borrow around 4.5 times your annual pre-tax income. Any more than this, and many consider the borrowing unaffordable. Richard Dana, chief executive of Tembo, said: “The challenge simply shifts from saving enough to borrowing enough. “The scheme’s deposit benefit is weakest where new builds are the most expensive.” Pushing prices up The Government’s own evaluation of Help to Buy found that homes bought through the scheme were around 0.9 per cent more expensive than comparable new builds, because of the looser borrowing rules. The IFS said the new scheme was likely to also put price up. Furthermore, the scheme only applies to new build homes – and experts say these are comparably more expensive than non-new builds. Across the 17 cities analysed by Tembo, the average first-time buyer new-build costs £236,750, which is £9,809 more than the average first-time buyer home. Issues with equity and reselling Although the equity loan for the property acts as part of the deposit, buyers will have to repay it, and will also face interest on it if they don’t do so within five years. If the price of their property grows, the equity loan grows too in proportion. For example, if someone buys a house for £300,000, using a 20 per cent equity loan which is £60,000, if they sell the house for £330,000, they will need to repay £66,000. Conversely, however, if the property value drops, the size of the equity loan owed drops in proportion. Some experts say this was a situation many found themselves in with the old scheme, and warn that the same may happen this time around – particularly because new builds often drop in value on second sale. Robin Edwards, partner at buying agents Cureton, explained of Help to Buy: “When buyers came to sell, their home was competing with other existing properties and potentially newer developments offering incentives. Buyers found they could not recover what they paid, particularly if they needed to move soon after buying.” Where the sale proceeds cannot cover the mortgage and equity loan, buyers may need to find extra money, or they end up in something known as negative equity – owing more than the value of their home – and cannot sell. “With a deposit of just 2.5 per cent, buyers have virtually no financial cushion if property values fall,” Edwards explains. Elliot Castle, chief executive of We Buy Any Home, said: “Before signing up, buyers need to think beyond the day they get the keys. Ask what the home would be worth as a secondhand property.” ‘Help to Buy is something we came to regret’ Louise says not having a big enough deposit pushed her towards HTB Louise O’Riordan, 50, regrets using the old Help to Buy scheme. Louise, from Bedfordshire, bought her three-bedroom new build in 2016 for £267,950. In April 2016, Louise and her husband were given six months’ notice to leave their rented property in Hertfordshire. At 39, they felt that if they were going to buy a home with a 25-year mortgage, they “needed to do it then.” They hadn’t saved a substantial deposit and so the Help to Buy scheme was their only realistic opportunity to buy a home. Louise said: “At the time, we believed we were making the best decision we could with our current circumstances.” The couple repaid the equity loan in 2021, adding approximately £52,000 to their mortgage. Louise said: “We had to increase our mortgage to pay off the loan. At the time, consolidating the Help to Buy loan into our mortgage made financial sense.” Just a year later, mortgage rates skyrocketed after the Liz Truss mini-Budget. “Those increases subsequently made our mortgage considerably more expensive than we had anticipated when we made the decision to repay Help to Buy,” said Louise. “I believe Help to Buy contributed to artificially inflated new-build house prices and disproportionately benefited developers rather than the people it was designed to help.” Is there a better solution? Some experts think that neither scheme is the right answer to the property challengers buyers face. Brian Byrnes, director of personal finance at Moneybox, said helping buyers take on more debt does not solve the deposit challenge many face. “It instead increases the risk of negative equity, particularly as high mortgage rates and persistent inflation weigh on the housing market.” He said government products helping people save, like the Lifetime ISA, were better solutions. Joseph Lane, founder of mortgage brokers Mortgage Lane, said for many, conventional buying and mortgages may be best. “A sensibly priced existing home with straightforward borrowing may be a stronger proposition than a subsidised new build carrying a premium and an additional equity loan,” he explained.