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Help to Buy scheme changes ‘will mean 25% drop in number of eligible homes’

New price caps mean that 80% of four-bed homes will be too expensive, with the North hardest hit, according to Hamptons.

Richard Reed

help to buy

The new regional Help to Buy price caps from 1 April will cut the number of new homes eligible for the scheme by a quarter, new research shows.

The new price caps mean that 80% of four-bed and 90% of five-bed homes will be too expensive for Help to Buy, according to analysis by Hamptons International.

In northern England, the number of new homes eligible for the scheme will be cut by almost half. The price caps have been set at 1.5x what the average first-time buyer paid in the region last year and mean Help to Buy cannot be used on any new home more expensive than this.

The report, The Evolution of Help to Buy, says strong house price growth over the past year means that around 5,000 fewer new home sales each year will be eligible for Help to Buy than if the caps had been introduced a year ago.

“Naturally, the price caps cut out larger, more expensive homes,” it states. “But given first-time buyers tend to purchase smaller and cheaper new homes, it means that the new caps are unlikely to make a significant difference to take-up rates.”

Mortgage Guarantee scheme

Hamptons says the launch of the government’s Mortgage Guarantee scheme is more likely to be helpful to buyers.

With lenders still rationing higher loan-to-value mortgage products, the scheme aims to open up home-ownership by acting as guarantor on mortgages with an LTV of 95%. Hamptons research shows this is likely to support around 100,000 sales.

The new scheme, which starts next month, will mean for the first time since the start of the pandemic that buyers with only a 5% deposit will be able to choose an older property, rather than new-build.

“This may mean that some first-time buyers with small deposits who would have previously used the Help to Buy Equity Loan could instead turn to the new mortgage guarantee scheme,” says the report.

“The numbers doing so will depend on how much confidence the guarantee gives lenders to broaden their criteria for those with a 5% deposit, alongside how competitive the rates on offer are. And specifically how close they are to Help to Buy products.

“The early indications are that rates will be slightly above Help to Buy Equity Loan mortgages. With Help to Buy rates currently ranging from 2.5% to 3.0%, and a 95% loan-to-value (LTV) mortgage not backed by the new scheme priced at 3.99% (but only available on houses, not flats), rates on mortgage guarantee products are likely to be somewhere between the two.”

Hamptons says for someone able to put down a 5% deposit on a typical property, the monthly cost of a mortgage on the Help to Buy scheme will be around £350 cheaper than the Mortgage Guarantee (outside London) during the first five years.

“Once owners start paying interest on the equity loan in year six, this saving falls to around £100 per month. For many buyers these figures are likely to prove prohibitive, keeping the Equity Loan scheme as their only route to homeownership,” adds Hamptons.

“However, for higher-earning first-time buyers with small deposits, the Mortgage Guarantee should allow them to broaden their search so it includes second-hand options. Potentially this gives them the opportunity to buy a cheaper home and/or one which requires a degree of work. This will allow them to reduce what they spend initially, enabling them to add value over time as and when they can afford to.”

April 6, 2021

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