Will Help to Buy Schemes Help Generation Rent?

By: Chris Smith

---

In the UK, it is engrained in us that we should one day own our own home. It is the sign of being a proper grown up. However the harsh reality is that this home owning may be out of reach for many young people.

In the current mortgage market, you need a deposit of at least 5% of a property’s value to get a mortgage. However to get the best mortgage rates, you may need a much bigger deposit at 20%. With the average property prices in England and Wales £188,553 and a whopping £500,000 in London, we are not talking about spare change here.

Recent statistics illustrate how hard it is for young people to raise that sort of money. Home ownership among young people has been on a steady decline for the last 25 years. More young people are renting and rent is rising much faster than income, making saving harder. If you aren’t in the fortunate position of having parents who can contribute to your deposit, what is the government doing to help you get on that elusive housing ladder?

Help to Buy Schemes

The government has launched a number of help to buy schemes in the last few years. 

Equity loans are available for new builds, where the government will lend you up to 20% of the cost of your new home so you only need a 5% cash deposit and a 75% mortgage. As London property prices are much higher than the rest of the UK, a London Help to Buy was introduced in February. This works the same as the equity loans except that the upper limit is increased from 20% to 40% for those buying in all London boroughs. These schemes are available to first time buyers, and ‘second movers’, those moving up the property ladder to a bigger home.

Saving for your first home deposit through a government Help to Buy ISAs can increase your savings by 25%, up to a maximum of £3000 a year. In the latest budget, the Chancellor announced the Lifetime ISA, which launches in 2017 and is open for those aged between 18 and 39. This ISA still offers a 25% bonus on savings but differs in that up to £4000 can be saved a year and that the savings can either be used for a first home, or for those that are already home owners, for retirement.

Shared ownership schemes are a cross between buying and renting. You buy a share of a property, usually between 25% and 75%, from your local housing association and pay rent on the part you don’t own. There is the option to buy a bigger share in the property at a later date. To qualify for shared ownership you can’t currently own a property and your household income must be lower than £80,000 a year, a bit more if you’re buying in London.  Buyers will still need to have a deposit of at least 10% of the share of the property they are buying and secure a mortgage for the remainder of that share.

Who do these help?

Although the majority of these schemes are aimed at first time buyers, will they actually turn the tide and help young people to buy?

The recent story of a MP and his wife who used the equity loan scheme to buy a new constituency home in her name highlights some of the flaws with the scheme. There is no cap on income for applicants and equity loans are open to first time buyers and existing homeowners. Although within the rules, this allows wealthy people to benefit as long as they technically haven’t purchased a house in their name before.

The majority of the schemes focus on boosting savings; however with increasing rent to income ratios, young people may not have the money to save, meaning they cannot take advantage of the schemes.

The schemes also only help out with the deposit. There will be other costs involved in buying that have to be taken into consideration, such as legal fees, mortgage arrangement fees, stamp duty, and valuation and surveyor fees. These costs won’t be covered by the mortgage and so will need to be saved in addition to the deposit.  

Critics argue that these schemes are just throwing money at the problem rather than tackling the root causes – lack of houses, speculation, a stilted economy and reduced social housing. They claim that help to buy has pushed up house prices, ensuring home owning is still out of reach for most.

So, if you are in the position to save money, these schemes may be a help to you, boosting your savings for your deposit. However, if you cannot save and don’t have parents that can help you out, then you may be renting for some time to come.