The end of Help to Buy will leave a large gap in demand for new homes in England when it ends in March 2023. The scheme has supported 31.4% of all new homes sales since its inception in 2013 and 36.0% in the three years to Q1 2021. So this milestone marks a major change for new homes buyers and for developers.

Schemes including Deposit Unlock, First Homes and an expanded Shared Ownership programme may fill a large proportion of the gap left by Help to Buy. Developers will also be delivering more new homes for grant funded affordable housing (including Shared Ownership) and Build to Rent.

HOW DOES HELP TO BUY HELP BUYERS?

Deposit Barrier
Help to Buy purchasers only need a 5% minimum deposit. Only 4.0% of all house purchases in the UK over the last five years were made with a deposit of less than 10%, due to the scarcity of mortgage products at this level. The average deposit for a first time buyer in the whole market over the same period was 24.2%. Buyers can deploy a larger deposit if they wish, but 54% of all Help to Buy purchases have been made with the minimum 5%.

Loan to income restrictions
Despite the small deposit, buyers only need to borrow 75% of the property value. This means that the mortgage interest rate is much lower for users of Help to Buy than other buyers with the same deposit. Mortgages at a LTV of 75% had an average interest rate of 1.29% in October 2021. For 95% mortgages, the average rate was 2.97%.

It also means that buyers with only 5% deposit can access higher value homes without hitting up against loan to income caps. Someone borrowing 4.5 times their income and using Help to Buy would need to borrow 5.7 times their income without Help to Buy. As banks are not permitted to do more than 15% of their lending at loan to income multiples of more than 4.5, that is unlikely to be possible for most buyers. Some higher LTI mortgages are available, but typically these are subject to minimum income requirements and maximum loan to value ratios. 

Repayment costs
The 20% equity loan (40% in London) is free of interest for five years. Often underestimated, this is a major advantage for buyers using the scheme compared to other home ownership schemes. After five years, interest becomes due on a Help to Buy equity loan at 1.75% of its value, rising at CPI plus 2% each year. This level of interest is cheaper than Shared Ownership, where rent of 2.75% is usually charged against the retained equity and there is no rent free period.


So Help to Buy has given new homes a major competitive advantage in the housing market. Without these advantages, aspiring homeowners may have less reason to choose new build over existing homes even if they can afford to.

CAN BUYERS MAKE THE SAME PURCHASES WITHOUT HELP TO BUY?

Deposit

One of the original aims of Help to Buy was to make homeownership accessible to those purchasers with only a 5% deposit. Such mortgages have been very scarce since the Global Financial Crisis in 2008.

Although availability has improved, the number of higher loan to value mortgages completed each year has remained very low compared to pre-GFC levels. The number of loans completed at more than 75% loan to value was still 50% lower in 2019 than it was in 2007.

We estimate that Help to Buy has accounted for around half of all house purchases by buyers with up to a 10% deposit since its inception.

Just over half of Help to Buy users (54%) have used only a 5% deposit and a further 24% used up to a 10% deposit. Two thirds of these buyers would find it very difficult to make the same purchase without Help to Buy or a similar scheme to help them overcome the deposit barrier.

Loan to income ratio

Bank of England analysis of the first four years of Help to Buy looked at loan to income multiples as well as deposits.² Of those buyers with a deposit of 10% or more, only one third of them would be able to obtain a mortgage without breaching the 4.5 income multiple barrier.

Combining consideration of both income and deposit, the Bank of England analysis suggests that only between 10 and 15% of Help to Buy users would be able to make the same purchase without Help to Buy.

This estimate appears to conflict with the findings of the Government commissioned evaluation of Help to Buy, published in 2017.³ It found that 45% of Help to Buy users could have afforded to buy the property they wanted or the property they actually bought without using the scheme. This was based on a survey of 1,500 users of the scheme, conducted by Ipsos Mori.

This could be right if those Help to Buy users have substantial savings that they could have used for their deposit, but chose not to. Since house prices have risen consistently across most of the country since 2013, this would be an unusual choice. The equity loan remains a proportion of the property value, so if prices are going up, the cash value of the equity loan also increases.

It is possible that respondents to the survey thought they would have used an alternative scheme to buy their chosen home, if Help to Buy hadn’t been available. Shared Ownership would have been an option for many, but volumes are limited by the amount of grant funding available through the Affordable Homes Programmes and number of homes delivered through Section 106.

WHAT ARE THE ALTERNATIVES TO HELP TO BUY?

Over the last three years, Help to Buy and Shared Ownership have supported an average of 72,000 new homes sales each year.  

It is now clear that there will be a range of support options available to prospective buyers of new homes after the end of Help to Buy. If First Homes, Deposit Unlock and Shared Ownership fulfil their potential over the three years following the final end of Help to Buy in March 2023, then they could support the delivery a combined 50,000 homes per year.

Other private sector schemes, such as Market Mortgage and Wayhome, will also play a role.

A further 5,000 will be able to buy unassisted, according to our estimates based on the Bank of England analysis. These are buyers with at least a 10% deposit and a LTI ratio of no more than 4.5.

That leaves a gap of 17,000 homes per year.

HELP TO BUY ALTERNATIVES IN DETAIL

Deposit Unlock The Housebuilders' solution

Volume housebuilders are the biggest potential casualties of the Help to Buy withdrawal. The Home Builders Federation has created ‘Deposit Unlock’ with the reinsurance broker, Gallagher Re.

All of the major housebuilders are backing the scheme and one of the largest lenders, Nationwide, has signed up to be one of the mortgage providers. Their current interest rate 2.9%, higher than Help to Buy. This may fall as volumes rise. The scheme enables buyers to acquire new homes with only a 5% deposit, thereby replicating one of the key selling points of Help to Buy. This scheme means that buying a new home will be much easier than purchasing an existing home for those with a 5% deposit, so new build will retain some of the competitive advantage that Help to Buy bestowed.  

Mortgage lenders are protected by a mortgage guarantee funded by the housebuilder that covers 35% of the property value. This is done in the background so, as far as they buyer in concerned, their loan is a standard mortgage product.

The buyer must however borrow the remaining property value and the challenge will be avoiding the 4.5x loan to income multiple cap. The Bank of England’s analysis of Help to Buy users suggests 46% of them could have made the same purchase at 95% LTV without falling foul of the loan to income cap. This scheme has the potential to help that substantial proportion of Help to Buy users to continue buying new homes, supporting around 19,000 annual sales.


First Homes The Government’s offering

First Homes are a discounted market sale product. They are sold at a price between 30 and 50% below market value, a discount that remains in perpetuity. The maximum value of a First Home, after the discount is applied, is £250,000 (or £420,000 in London).

After an initial grant funded pilot of 1,000 homes, future First Homes will be delivered through the planning system as part of Section 106. The level of discount and detailed eligibility criteria for buyers will be set by local planning authorities, but the scheme will not be available to households with a combined income of over £80,000.

Planning Practice Guidance states that 25% of all affordable homes secured through Section 106 should be first homes. We have estimated that this will yield approximately 7,000 First Homes each year, once the new requirement has become established.

How First Homes will fit into the housing market jigsaw is complex. This is due to the value caps, varying levels of housing affordability around the country and the option for local authorities to set different discount levels. Our previous analysis of this can be found here.


Shared Ownership The tried and tested

Shared Ownership is a well-established affordable housing tenure. Buyers purchase an initial stake in the home and rent the rest at a discounted level. Before Help to Buy, initial stakes of over 50% were common, but as a result of competition from Help to Buy lower initial stakes have become more dominant. Until recently, the initial stake had to be at least 25%, but this has been reduced to 10%.

The overall volume of Shared Ownership is limited by the amount of subsidy available. This comes either from the Affordable Homes Programme or Section 106. Although Section 106 funded homes are likely to be reduced by the new First Homes requirement (see above), the number funded by grant through the Affordable Home Programme could increase by a factor of three over the next five years.

In total, this could mean an additional 7,000 homes for Shared Ownership each year between April 2023 and March 2026 compared to the last three years. How long this level of delivery lasts will depend on affordable housing funding after the end of the current 2021-26 programme.

WHAT WILL FILL THE GAP?

Build to rent

We expect that the growing demand for investment in build to rent homes could fill most, if not all, of this gap in delivery left by the withdrawal of Help to Buy.

Before the disruption of the pandemic, Build to Rent volumes had doubled over the three years to 2020 and, given the appetite from the investment community, we think expecting volumes to double again by 2026 is conservative.

That would deliver 13,000 additional homes per year over the three years to 2026 compared to the last three years, reducing the size of the gap to just 4,000 homes per year.


Changing the product

Many Help to Buy users would be unable to use Deposit Unlock without breaching the loan to income cap, as discussed above. How much cheaper would new homes need to be for them to be able to afford them?

Most current Help to Buy users would exceed the LTI cap by a relatively small amount. Without the equity loan, circa 18% of Help to Buy users would be at LTIs of between 4.5 and 5.0 (according to the Bank of England analysis). If they were to buy a home up to 8% cheaper, they would be below the LTI cap.

A further 17% would be between 5.0 and 5.5, and could get under the 4.5x cap with a home up to 17% cheaper.

If just a quarter of these buyers, who would be between 4.5 and 5.5 LTI, could be satisfied with a cheaper, and likely smaller, home, additional demand could be generated for nearly 5,000 new homes.