The Daily Telegraph - Saturday - Money
How a generation of homeowners came unstuck
The families that George Osborne helped on to the property ladder may soon fall off as they face daunting mortgage rises, writes Ruby Hinchliffe
The man behind Help to Buy, former Tory chancellor George Osborne, claimed the policy had helped hundreds of thousands of families get on the property ladder, supported thousands of construction jobs and made “billions” for taxpayers.
This is true for the developers who saw profits rise by as much as 54pc, and the Treasury which is now cashing in as interest piles on to the loans handed out to young buyers.
But the story is unravelling for many families who bought into the developers’ glossy brochures and the Government’s billboard-sized adverts is one of acute uncertainty and spiralling costs.
Having paid a premium of as much as £ 38,500 for their new- build homes, Help to Buy owners are facing surging interest rates on not one, but two loans.
And the problem is getting worse. Between January and July this year, 4,854 Help to Buy households had fallen behind on repayments – up from 2,413 last year.
Wobbling house prices also mean they face the prospect of negative equity.
Help to Buy loans, which were launched 10 years ago, are no longer on the table, but ministers know that they need to give first-time buyers a helping hand on the property ladder – especially with an election looming.
At this week’s Conservative Party Conference, ex-housing minister Brandon Lewis said he finds it “embarrassing that for the first time in living memory there is no offer or specific package for first-time buyers”.
It is understood the Government is working on a potential successor, but, as Telegraph Money’s investigation has found Help to Buy has left a far from glorious legacy.
Help to Buy equity loans have been described by some as “a free lunch”, largely because no interest is payable in the first five years. But in the sixth year, a 1.75pc interest rate kicks in, which is compounded in line with inflation each year thereafter. Borrowers also cannot pay off their equity loan in smaller chunks than half, or in full, and have to pay a solicitor each time they do this.
A borrower buying a
£ 500,000 house in 2017 with a 5pc deposit outside
London could take out a 20pc equity loan with the Government, and a 75pc loan with a mortgage lender to cover the remaining value of the house.
If they fixed the commercial loan for five years at about 3pc on an interest- only basis, they would be paying back £ 937.50 each month. Last year, this borrower would start to pay 1.75pc on the 20pc equity loan, and have to refinance their 75pc loan at a higher rate. If that higher rate was 6pc, then their monthly mortgage repayment would more than double to £2,020.
Marc von Grundherr, director of estate agent Benham and Reeves, said the Help to Buy “ticking time bomb could soon explode” as five-year interest- free periods end and borrowers re-fix on to rates they cannot afford.
“Unfortunately for those facing this Help to Buy spike in unaffordability, the options are limited,” he said. “Many lenders are refusing to touch Help to Buy homes, while others require 10pc equity in addition to the deposit you originally placed.
“This only really leaves you with the option to sell your home, but this will prove problematic for those who may have fallen into negative equity.”
Meanwhile, the Government has made a “tidy sum” off the £24.7bn in equity loans on its balance sheet, according to calculations by Benham and Reeves. In the East Midlands, equity loans have been most profitable. The average size grew from £51,218 to £60,138 – an increase of £8,920.
In the North West, loans have grown by £8,432, in the South West by £8,025 and in the West Midlands by £8,001. The handout has only backfired for the
Government in one region, London, where their 40pc share in the average property has fallen by £1,590.
A government spokesman highlighted that 1.75pc is “significantly lower” than current mortgage products. They added: “Supporting aspiring homeowners is a Government priority and since 2010 over 860,000 first-time buyers have been helped into home ownership through Gove r n - ment-backed schemes.
“We know building more affordable homes is key, which is why we are investing £11.5bn to build the affordable, quality homes this country needs.”
In 2020, Daniel Hyatt bought a £450,000 three- bedroom house in Guildford through Help to Buy. He took out a £ 90,000 equity loan that has grown to £105,000, and has been paying 1.8pc on a five-year fixed mortgage.
The 32-year-old said he and his partner have been trying to save up to pay the equity loan off in full once the interest-free five years are up, but reckon there will definitely be a shortfall. They have saved £ 50,000 so far, but now have a one-year- old and are paying up to £1,500 a month in nursery costs.
Mr Hyatt worked out that if he pays off the majority of the equity loan, and car
ries over £30,000 to his main mortgage, his repayments will jump from £1,090 to £1,970 based on a 6pc interest rate. If he had not saved anything, monthly payments would be going up to £2,400.
He said: “It’s not knowing what you might have to pay in two years which is really terrifying. It’s the fact it’s tagged as interest-free, but in reality it’s just another form of interest.”
Help to Buy was a lucrative opportunity for developers. For every 1 percentage-point rise in the fraction of Help to
Buy properties they built, roughly 1pc would be added to their revenue.
Christian Hilber, a professor at the London School of Economics, wrote a paper which found that in London Help to Buy increased house prices by 7.94pc and had “no detectable effect” on construction volumes in supply constrained and unaffordable areas.
Meanwhile, he said it boosted developers’ revenues by 54pc. Turnovers averaged £540m, with profits of £64m.
Prof Hilber said: “Rising interest rates – just at the worst time when the free interest rate-period ends – is just one of the many flaws of the scheme.”
Meanwhile, some academics worry that the construction data fed into the UK’s monthly inflation figures is skewed, because the Office for National Statistics cannot separate out developers’ profits. Simon Roberts, of Brunel University, said this makes it impossible to know how much house prices have actually grown.
Steve Turner, a director of the Home Builders Federation, responded that developers have invested in the sector at an “unprecedented rate” – with house building peaking at 250,000 over the past decade. The trade body blames an “anti- development policy environment” for recent declines in numbers.