Charles Fairhurst
The Financial Times reported last week that Nationwide, NatWest, RBS and Santander are no longer willing to re-finance homes acquired with Help-to-Buy or ‘HtB’. Part of their reasons are that HtB allowed First-Time Buyers (‘FTB’) to over-extend themselves for the five years they received an additional loan of up to 20% (outside of London) or 40% (in London) of the purchase price on an interest-free basis.
At the fifth anniversary when the HtB loan become interest bearing, those borrowers who have not had a substantial increase in their income may struggle to fund both the mortgage and the second-charge HtB loan. Lenders are wary that most new homes are sold at a considerable premium (this price premium was perversely supported by the availability of HtB) and worry that prices of those no-longer brand new properties are either likely to stagnate or even fall by the fifth anniversary, having lost its price premium.
Let’s have a look at how first-time-buyers might have overstretched themselves. A young household in London with a deposit of £26,000 and earning a joint income of £63,500 with a standard mortgage loan without HtB would get a maximum loan at 4.5 x their joint income. This hypothetical income example is close to the average London salary.
Without HtB funding this average London household with its £26,000 deposit and £63,500 earnings p.a. could only afford a £320,000 flat (including costs). But let’s take the example of British Land’s development London Square, Quebec Way in Canada Water where it is offering the same first-time buyers an opportunity to acquire a one bedroom flat starting at £520,000. British Land suggests a FtB with a £26,000 deposit gets a £208,000 HtB loan (interest-free for five years) and fund the balance with a £286,000 first-charge (standard) mortgage. In five years’ time when the interest-free loan starts to incur interest at £1.75% the HtB loan cost will be £3,640 pa.
Due to HtB the hypothetical household have been able to purchase a far more expensive property: £520,000 rather than £320,000. By 2023 this couple would have a remaining first and second charge mortgage of £476,000 in total and they would need a joint income of £105,000 (an increase of 65% in 5 years!) to service the mortgages at current interest rate levels if they would want to do so.
If over the five interest-free years they saved the full £3,640 p.a. and didn’t use it to facilitate day-to-day spending the hypothetical London couple would have saved some £18,000 before tax and could have reduced their HtB mortgage to between £200,000 to £190,000. How much of the new-build price premium they paid for the new flat would have been paid off with that £18,000 would be an interesting question.
The purchase of a one bed flat might seem appropriate now, but in five years’ time one can only imagine that a young household might be growing, wanting something bigger. And other young HtB households in the same block of flats might all be wanting to sell out, too, putting pressure on pricing.
If this hypothetical couple do want to sell their flat once interest becomes payable on the HtB loan, the house price index will need to have risen at over 5% p.a. to allow them to sell their one-bed flat and reduce their HtB loan. Let’s hope that meanwhile the tax rates will not have increased for higher earners.
Her Majesty’s Treasury has been trying to find buyers for the 20%-40% interest they hold in a large number of homes. Many of these HtB loans are located in London and the south of England where property values (particularly in new properties) have fallen over the last five years. Hopefully this will concentrate the Government’s mind on whether this is an efficient means of funding the increased production of new homes and whether FtB’s may come to regret in the future their use of HtB to help them get on the lowest rung of the housing ladder. Parents might regret the scheme as well. Anecdotal evidence suggests that the Bank of Mum and Dad has funded the deposit and they will be called upon to bridge the refinancing shortfall.
As a parting shot I’d like to end with the observation that this week it was reported that 169,102 properties have been bought using the HtB schemes. However, I think this a material under-estimation as many units are being bought off-plan and have yet to complete. The Institute for Public Policy Research – according to the Times last Friday – believes the figures show that the HtB scheme should be reformed as it’s not helping those most in need.
Since the scheme was introduced in March 2013 reportedly 4% or 6,717 households with an income of more than £100,000 have used the scheme. Over a third of households earned over £50,000 p.a. jointly and 13% over £80,000 p.a.. This is seen as proof that the HtB policy is not supporting the right people. They argue that the majority of those who have bought through the scheme would be able to buy at some point without the support of HtB.
Perhaps the households with the higher incomes buying through HtB are merely a reflection of London and its high pricing, but the IPPR probably make a very fair point that the HtB scheme is not helping those most in need. Bar the housebuilders and the politicians who fear a drop in house prices as it hits the older voters who come out to vote the most, who benefits exactly?
Well, maybe in the future some companies offering redress for the HtB scheme. Will we see adverts in 5 years time asking “have you claimed for Help to Buy?“ similar to the current adverts asking “have you claimed for PPI?”
Additional reading: https://www.thetimes.co.uk/article/high-earners-are-winners-in-help-to-buy-scheme-xbx3lt825
The author, Charles Fairhurst, is a PRS specialist and ex institutional PRS fund manager, providing training and consultancy through Property Overview. The booming PRS has few with real in-depth hands-on experience and knowledge and Property Overview offers insight and experience through Charles Fairhurst and other senior PRS professionals. Please visit https://www.propertyoverview.co.uk/prs-courses
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