The Coming Crisis for Help to Buy Homeowners

When former Chancellor George Osborne introduced the Help to Buy scheme in 2013, he touted it as a revolutionary initiative to help first-time buyers get a foot on the property ladder. By providing an interest-free equity loan for 5 years, Help to Buy made it possible for buyers to purchase a newly built home with just a 5% deposit.

But a decade later, the cracks are beginning to show in Osborne’s flagship housing policy. As interest-free periods come to an end, many Help to Buy borrowers now face financial difficulty. Surging interest rates mean their monthly mortgage costs are set to double or even triple. With falling house prices also a risk, negative equity looms – trapping families in unaffordable homes.

In this blog post, we’ll analyse the key problems with Help to Buy and how they now threaten the finances of thousands of buyers.

The Lack of an Exit Strategy

A major design flaw with Help to Buy is the lack of a clear exit strategy for borrowers once interest begins to accrue on their equity loan.

After 5 years, Help to Buy borrowers must start paying interest of 1.75% on their equity loan, with rates then rising each year in line with inflation. At the same time, they usually need to re-mortgage their main home loan at a higher interest rate.

This results in a payment shock, with monthly costs dramatically increasing. A borrower who fixed their mortgage at 3% could see payments more than double when they refinance at 6% and the equity loan interest kicks in.

And options for escaping this bind are limited. Most lenders are unwilling to allow transfers of Help to Buy loans. This leaves households with little choice but to pay the higher rates or attempt to sell up.

But selling brings difficulties of its own…

The Threat of Negative Equity

In many areas, house prices have fallen from their peak – especially for new builds.

This puts some Help to Buy borrowers at risk of negative equity. If their home’s value drops below the outstanding mortgage and equity loan, they cannot sell without taking a loss.

Being trapped in negative equity would be disastrous for struggling households whose monthly payments have suddenly spiked. Even downsizing to a cheaper property may not be possible.

Unless house prices recover before their 5-year deadline, these owners will be stuck between a rock and a hard place when their payment holiday ends.

The Government Failed to Foresee Rate Rises

Critics argue the Government failed to anticipate how interest rate rises could ruin affordability for Help to Buy borrowers.

When devising the scheme in the years following the financial crisis, ultra-low interest rates were expected to persist. But as the economy has recovered, the Bank of England has increased rates to tackle inflation.

This has exposed how Help to Buy failed to futureproof affordability for borrowers. The transition from 1.75% equity loan interest to a full mortgage rate on 100% of the property was always going to be harsh.

But far higher interest rates than forecast have made the crash landing even harder. Unless the Government acts, thousands of families will struggle to keep up with payments.

Developers Reaped Massive Profits

While buyers suffer, property developers made huge profits from Help to Buy.

One London School of Economics study found developers’ revenues jumped by 54% thanks to the scheme. This was achieved by inflating the prices of new builds specifically targeted at Help to Buy purchasers.

Buyers in the capital paid an average premium of £38,500 for their Help to Buy home – more than double the implicit interest rate subsidy they received from the Government.

Cashing in on the scheme boosted profits and executive bonuses in the housebuilding sector. But it means those who could least afford it paid massively over the odds for often shoddily constructed new build homes.

Does Help to Buy Distort Inflation Figures?

Some experts also suggest Help to Buy has skewed official house price inflation statistics.

In calculating price growth, the ONS does not adjust for developers’ inflated profits. So if builders raised prices far beyond true construction costs, this would overstate gains.

One academic analysis found profits per new build dwelling grew by £75,000 between 2000-2019. Yet because the ONS cannot separate raw selling prices from costs, this rapid margin growth may have warped inflation measures.

If house price rises have been over-estimated, that could impact monetary policy. In future, the government may need to account for builders’ excessive profits to avoid distorting inflation.

What Next for Struggling Borrowers?

With interest rate rises hitting hard, concerns are mounting over Help to Buy borrowers in distress.

Citizens Advice says increasing numbers are falling behind on repayments. It wants ‘breathing space’ schemes to pause debt collection and allow owners time to get back on track.

But beyond short-term relief, fundamental reform is needed. The Government must find a way to ease families onto longer-term sustainable mortgages.

Options include allowing equity loans to be paid off gradually or converted to shared ownership. Without urgent action, we risk Help to Buy turning into a national foreclosure crisis.

The Successor: First Homes

As Help to Buy is phased out, the Government has launched First Homes as a replacement shared ownership scheme.

Under First Homes, buyers can purchase a new build home at 50% discount, funded by the developer. The buyer owns 70% initially, with the rest held by the local council or housing association.

Crucially, when they sell, their 70% share is passed on to another first-time buyer at the same discount. This means the scheme is sustainable long-term for successive buyers.

By removing the flaws of Help to Buy, First Homes may prove a better route to affordable home ownership. But the discounts come at a greater upfront cost to taxpayers, restricting the availability of the scheme.

Getting on the ladder remains extremely tough for young buyers. With no easy answers, the Help to Buy legacy serves as a warning that quick-fixes often store up greater trouble for the future.