The “Help to Buy” scheme from the UK government might be a ticking economic time bomb waiting to explode. This analysis comes from Benham and Reeves, a London-based estate agency at the centre of the UK property market.
A Brief Overview of “Help to Buy” Scheme
If you’re new to the property sector in the UK, you might be wondering what the Help to Buy scheme is all about. Started on 1st April 2013 and ended on 31st May 2021, the Help to Buy initiative offered an equity loan of up to 20% on the purchase price of a new-build home costing up to £600,000. The loan share rose to 40% for those acquiring properties in London. But importantly, it was an interest free equity loan for a period of five years.
What this meant was that the UK government had an entitlement to a slice of the future sale proceeds of a property, equivalent to the contribution it made to help with the purchase.
Help to Buy Scheme Beneficial for Government
The data-driven research by Benham and Reeves presents some impressive figures. When considering both the depreciation of a property over the past half-decade, in tandem with growth in property values, the government has banked a tidy sum on each Help to Buy property across almost every region of England.
The East Midlands region turned out to be the most profitable for the government regarding their Help to Buy handouts. The average Help to Buy home in the area is now valued at approximately £300,690, up from £256,089 five years ago. Consequently, the government’s original share for those utilising the loan to the full 20% has risen from £51,218 to £60,138 – marking an appreciation of £8,920. This pattern is also evident in the North West (+£8,432), the South West (+£8,025), and the West Midlands (+£8,001).
However, London was the only region where the scheme didn’t quite work out, with the potential 40% government share in the average property falling by £1,590.
Rising Interest Rates After Five Years
Notably, many Help to Buy homeowners have already hit the end of their interest-free period of five years. This reality is particularly critical as this situation unfolds parallel to the escalating interest rates.
The first year after the interest free period will see the interest levied fixed at 1.75%. Nevertheless, this still implies that the average Help to Buy homeowner will face an upsurge in costs. For those residing in London, the average annual interest and management fee due in the sixth year of the Help to Buy loan and the first year of the non-interest-free loan payback period amounts to £3,455 annually or an added £288 monthly on top of the cost of a Help to Buy mortgage. Even in the North East, arguably the region with the lowest additional costs, Help to Buy homeowners will witness an extra £751 stacked onto the annual cost of their loan repayments.
The Post-Interest-Free Period Scenario
The revelation becomes more concerning beyond the first year of interest applications. The interest owed will increase each year by the annual increase in the Retail Price Index (RPI) inflation plus 1% — a percentage that recently surged from 3.2% in July 2018 to 9.0% in July 2023.
This implies that Help to Buy homeowners stepping into their seventh year face a steep increase in the monthly interest paid. For instance, those in London who were paying a fixed rate of £3,455 in their sixth year, will watch this cost climb to £3,809 due to inflation — a leap of £354.
The Help to Buy Time Bomb
Director of Benham and Reeves, Marc von Grundherr, explains the scenario in dire terms. “The ticking time bomb of Help to Buy could soon explode, potentially leading to homeowners losing their homes if they aren’t able to manage these escalating costs,” he says.
Potential property investors must understand that post the interest-free period, homeowners don’t just face higher costs regarding their monthly mortgage repayments. They will also have to account for the additional interest charges, which is only set to climb as the years go by.
Help to Buy homeowners facing unaffordability have limited solutions. They can only repay the equity loan in half or full, which is not feasible for many. Remortgaging options are extremely limited, and selling the property might lead to problems, particularly if the owner is in negative equity.
This situation highlights the potential issues with the Help to Buy scheme. Unfortunately, it appears that what was once touted as a solution for homebuyers might now be turning into a problem with clear consequences on the horizon.