The trouble with the sheer volume of Budget coverage in the press is that it’s easy to overlook some of the less dramatic announcements. Here are two property-related changes you might have missed, along with a rare good-news story for landlords.
Help to Buy has its wings clipped
Last week’s Budget confirmed that the Help to Buy equity-loan scheme, which offers taxpayer-backed loans worth 20% of the purchase price of a new-build house, will be extended until 2023. But from April 2021 it will only be available to first-time buyers. Buyers will also only be able to purchase properties worth up to 1.5 times the “current forecasted average first-time buyer price” for the region, with a maximum of £600,000 for London. This will mean buyers in the north east will only be able to buy houses worth a maximum of £186,100, while those in the north west will be able to spend up to £224,400.
The current iteration of the equity-loan scheme has been widely criticised for pushing up the price of new builds, as it widened the pool of people who could suddenly afford new-build properties and fuelled demand. So it follows that a price cap might push prices down somewhat by tempering demand, perhaps to the point where the original Help to Buy borrowers could have afforded to buy without the scheme. Unfortunately, these people are already (or will soon be) stuck paying the interest on their government loans (which are interest-free for the first five years).
Crackdown on energy efficiency
Another measure from last week’s Budget that escaped many people’s attention will see more landlords required to improve the energy efficiency of their properties. Since April, landlords who own properties with an energy-performance certificate rating of F or G have had to upgrade them to at least band E or face being barred from arranging new tenancies. Yet landlords only had to carry out these improvements where financial support was available to cover the costs.
From 2019, however – a date is yet to be specified – landlords will have to pay for improvements that don’t exceed £3,500. The cost of bringing a house to the minimum energy-efficiency level is typically around £1,200. This new rule will affect 290,000 properties, estimates the government. Most landlords should not be affected by this rule change, assuming their properties already comply.
Buy-to-let borrowers in demand
Mortgage lenders are offering attractive deals to buy-to-let landlords, in a bid to win the business of those who haven’t left the increasingly unprofitable sector. The past few years haven’t been kind to landlords, as the government has brought in various taxation and regulatory changes in an attempt to slow the expansion of the buy-to-let market. In the first half of this year, landlords spent £12.1bn on new buy-to-let purchases, which is 30% lower than the amount spent in the first half of 2015.
So buy-to-let lenders are competing for fewer customers, and adjusting their offers accordingly. Last month the average five-year fixed buy-to-let rate had fallen to 3.4%, the lowest level since data provider Moneyfacts began collecting these figures in November 2011. Leeds Building Society currently offers an “easy start” mortgage, which gives landlords an initial three months of interest-free payments before reverting to a fixed rate of 2.72% for the rest of the five-year period. The Mortgage Works, part of Nationwide Building Society, offers a five-year fix at 1.99% (plus a £1,995 fee), while Sainsbury’s offers a two-year fix at 1.4%.
The West Midlands has had the third highest number of homes in England sold through the Help to Buy equity loan scheme since its launch five years ago.
More than 169,100 completed Help to Buy equity loan purchases have been made since 2013 worth an estimated £42.2 billion.
The figure for the West Midlands was 7,074, with Birmingham the area with the most at 1,532.
Of all purchases nationally, 81 per cent were made by first-time buyers.
The scheme is set to run until 2021, although it has been under scrutiny with claims it is enabling people who can afford to buy without the equity loan to climb on to the property ladder with just a five per cent deposit, thus driving up property prices.
Homelessness charity Shelter analysed the increased amount of mortgage lending in correlation to the scheme and concluded Help to Buy has increased the average home price by £8,250.
Housing experts at Fasthomes.org carried out the research to find out which counties in England have had the most and least completed Help to Buy equity loan property purchases.
It found that London was top with 12,206 and Greater Manchester second with 7,280. Staffordshire had 3,737.
Within the West Midlands Sandwell had 991 sales, Walsall 922 and Dudley 753.
The Government launched the Help to Buy equity loan mainly to help people step on to the housing ladder. It allows buyers with a minimum five per cent deposit of a property value to secure an interest-free loan of a further 20 per cent in England and Wales for the first five years.
The loan is only available on new-build homes up to £600,000.
The Government id currently deciding on the future of Help to Buy.
The Home Builders Federation says the scheme has been an “unmitigated success”, with 81 per cent of those helped having been first-time buyers.
The UK housing market is a “bubble on a bubble” – and property prices, reported this morning to average over £302,000, are over-valued by around 12%.
The ‘bubble’ warning comes from Societe General global strategist Albert Edwards, who says the bubble has been inflated by a decade of loose monetary policy and, in particular, Help to Buy.
Edwards said: “What you are doing is lending them [buyers of new-build homes] more money backed by the taxpayer to push up house prices even more.”
He said that while US house prices had corrected back to normal levels after the financial crisis of ten years ago, the UK housing market had become a “bubble on top of the previous bubble”.
He said that the housing bubble could burst in the next recession, which he believes would also wipe 80% off the value of equities and herald a new “ice age”.
Edwards, who works for the French bank in London, said that it was a damaging myth that it is a lack of supply that is causing the UK housing crisis.
He blamed the “free money” of Quantitative Easing and Help to Buy, which he told yesterday’s Telegraph had been implemented under “that moron” George Osborne.
Edwards said: “There’s a lot of stock there that could just be dumped on to the market. Nothing engenders selling more than falling prices.
Under Help to Buy, purchasers of new-build homes need put down only a 5% deposit, but can take out a 20% government loan to bring the total deposit to 25%. They are not charged fees on the loan for the first five years, but must then start paying interest. When the home is sold, the Government will reclaim its 20% stake plus a share of any increase in value.
Meanwhile the International Monetary Fund says that house prices in some of the world’s largest economies, including the UK, could be over-valued by as much as 12%, and separately this morning the Daily Telegraph’s front page story was a call to cut Stamp Duty “to end our housing disgrace”.
Boris Johnson said Theresa May should cut “absurdly high” Stamp Duty and abandon affordable housing targets that developers currently have to meet.
The LSL Acadata survey reported this morning that the average house price in England and Wales now stands at £302,251 after a tiny monthly fall of 0.2%.
The figure, for July, is still up 1.6% on an annual basis.
In London, the average property price is £625,529 with annual falls in 21 out of the 33 boroughs.
Transactions during the month were an estimated 75,000, 2% down on June. In the first seven months of this year, transactions are thought to be 4% down on the same period last year.
There was also a 7% drop in sales in the second quarter of this year.
In today’s Telegraph, Boris Johnson says that the proportion of owner-occupiers aged between 25 and 34 has “plummeted to 39%”. However, the Halifax says that first-time buyers now represent 51% of the market and has also reported that Help to Buy has been a significant factor in the rise of first-time buyers – see our next story today.
The government’s Help to Buy loan was launched in 2013 with the aim of helping young people onto the housing ladder.
Available only for new-build homes, the idea is simple: the government lends buyers up to 20 per cent of the cost of the home, and the buyer then only needs a 5 per cent cash deposit and a 75 per cent mortgage to make up the rest.
The government part of the loan – the 20 per cent – is interest-free for the first five years.
Between the scheme’s launch in April 2013 and the end of December 2017, almost 159,000 properties were purchased using a Help to Buy loan.
This year marks the fifth anniversary of the scheme, which means payments on the first Help to Buy loans are now becoming due, initially at a rate of 1.75 per cent. On a loan of £40,000 this equates to £700 a year or £58.33 a month. After that, they will increase by the rise in retail price index, plus another 1 per cent every year, which means that £58.33 monthly repayment will shoot up to at least £91.60 in year seven.
So with this in mind, is the Help to Buy scheme a good investment or is it a ‘buy now, pay later’ scheme about to cause financial problems for many suddenly faced with new interest payments?
You can get on the housing ladder sooner
The first clear benefit of the scheme is that it can help first-time buyers get onto the housing ladder a lot sooner than they may otherwise have been able to. With Help to Buy, borrowers only need to find a 5 per cent deposit, which means not only can they can save their deposit more quickly, but, as house prices have risen significantly over the past five years, means they potentially bought the property for less than if they had had to wait. The value of this has already been demonstrated by the 159,000 who have already used it.
You could buy with a smaller deposit but get better mortgage rates
To buy your first home most lenders are looking for 10 per cent deposit. Which means on a house worth £179,594 (the average cost of a first time buyer property) the buyer would need a deposit of £17,960 and be left with a mortgage of £161,635.
With the Help to Buy scheme, the government puts in 20 per cent and the borrower only has to find a deposit of 5 per cent. This means on the same property, the borrower pays a deposit of £8,980 but is left with a much lower mortgage – £134,696 and therefore a better loan-to-value and consequently a lower mortgage rate. So, not only is the main mortgage lower, but the client also gets a more competitive rate of interest.
You can borrow interest-free for five years
Buying a home is obviously an expensive business, but it does not stop once the contract is signed and the house is bought. There are all sorts of other expenses in the first few years of owning a new home, and the fact the government portion of the loan is interest-free for five years can be very helpful.
However, while the Help to Buy scheme gives those who could not otherwise afford to buy the opportunity to do so, there are drawbacks, and advisers must ensure their clients have carefully considered these before committing to a loan.
The loan gets more expensive
The interest on the government portion of the loan is quite low when it becomes due: 1.75 per cent. However, after the sixth year, the rate starts to increase. The borrower needs to have budgeted for this, which is what the first swath of Help to Buy borrowers are facing right now.
This sudden introduction of charges can cause problems for those who are unprepared
While the interest-free loan seems very attractive at the time, once the borrower has to start paying it back, interest will increase by 1 per cent plus any increase in the RPI each year. So even if the RPI falls at any time, charges on the government loan will still increase by at least 1 per cent, which on a £40k loan is at least £30 a month more each year. This ever-increasing cost is something potential buyers need to be aware of and prepared for.
It is therefore vitally important that advisers make it clear to their clients looking to use Help to Buy that the loan is not interest-free indefinitely, and make sure they are in position to put money aside to prepare themselves financially for when the loan does need to be paid back.
Not all lenders will lend on Help to Buy, which means that when a client does come to the end of their deal, their options may well be restricted. This, combined with the rising costs of the government part of the loan, means clients need to be cautious.
Advisers need to ensure their clients are familiar with the lenders who will remortgage a Help to Buy deal, so they can help their clients to remortgage if need be.
You could fall into negative equity
We know that house prices fall as well as rise, but due to the structure of the Help to Buy loan, there is a risk of negative equity.
There is speculation that Help to Buy has inflated house prices, and that those on the scheme have paid more for their new builds than they are actually worth.
This means if house prices fall, there could be Help to Buy borrowers in negative equity. As first-time buyers quite often move after two or three years, this could cause real problems, especially if these borrowers come to the end of theirdeals and find their LTV has actually increased.
There is also the issue that homes bought new using the scheme are competing with new builds, making it harder for their owners to sell, possibly forcing them to drop their asking prices.
Your home is not 100 per cent yours but you are responsible for it
With a standard mortgage, the lender’s charge only covers the amount owed, with the borrower retaining any additional equity at the point of sale.
With Help to Buy, advisers need to make it clear to clients that the government has a charge for the initial 20 per cent borrowed but will also benefit from any rise in the property’s value, even if this is due to improvements the client has made and paid for.
Advisers also need to make clients aware they will need permission to make any substantial improvements to the property and will pay 100 per cent of the cost of those improvements, but only receive 80 per cent of the profits.
You cannot rent the property out
One of the stipulations of a Help to Buy loan is that you cannot sublet it, something, Dave Miller warns, many people are unaware of.
“If a couple who both own their own homes decide to move into together, it would be quite sensible to move into one property and keep the other one as an investment and rent it out.
“But, if that property was bought through Help to Buy, subletting it puts the owner in breach of their loan agreements. The only way a Help to Buy can be rented out is by repaying the Help-to-Buy part of the loan.”
So is it worth it?
The expectation was that the borrowers’ wages would go up, or the value of their home would increase, or both, leaving them in a position after five years to either pay off the government part of the loan in full or start paying back the loan on top of the rest of their mortgage payments. But for many it may not have worked out like that.
Many houses bought on Help to Buy schemes have not increased in value as much as the owners may have hoped, while some have actually dropped in value, often because the original prices were inflated.
We have also seen wages stagnate, inflation rise and interest rates may rise soon, which means not only will those on Help to Buy see their government loan due for repayment, but could see their monthly mortgage repayments rise too, a double whammy.
The Help to Buy scheme has seen lots of first-time buyers taking on a huge financial commitment, thinking their financial position would improve by the time the first payments were due, but five years down the line some are now finding they are not quite where they wanted to be and this could start to cause affordability issues.
Nevertheless, the scheme has been very useful, and many first-time buyers who otherwise would have not been able to get a foot on the property ladder have done so.
Advisers need to ensure any client looking to buy using the Help to Buy scheme is fully aware of all the pros and cons and that their situation suits the scheme. Once a client is on the scheme, advisers should be contacting them at least annually to ensure they are making preparations forthe future.
We do not want to end up in an interest-only mortgage situation, with customers burying their heads in the sand until it is too late.
Since the Help to Buy: Equity Loan scheme was launched on 1 April 2013, a total of 158,883 properties have been bought with an equity loan up to the end of 2017.
The latest government figures show that the total value of these loans was £8.27 billion, with the value of the properties sold under the scheme totalling £39.28 billion.
Four out of five purchases (81%) were by first-time buyers accounting for 128,317 homes.
The mean average purchase price of a property bought under the scheme was £247,230, and the mean equity loan was £52,026.
In London, the maximum equity loan was increased from 20% to 40% from February 2016. Since then up until 31 December 2017, there were 6,867 completions in London – the majority (5,546) were made with an equity loan higher than 20%.
For the Help to Buy: NewBuy scheme, 5,694 house purchases were made since the launch of the scheme in March 2012. This scheme closed to new mortgage offers on 8 March 2015.
One in four new housing completions bought with Help to Buy loan
According to research by the Intermediary Mortgage Lenders Association (IMLA), the Help to Buy scheme made up 27% of all new housing completions between April 2013 and March 2017. So its role in helping people get onto the ladder cannot be underestimated, says the trade body.
Kate Davies, executive director of IMLA, commented: “These statistics show that there is still considerable appetite for Help to Buy among first-time buyers. As we approach what is a pivotal juncture for the industry – with the scheme due to come to an end in 2021 – clarity is urgently needed over what will come next.
“The scheme has already helped over 150,000 households into home ownership – and with the government setting itself targets to build a million new homes by 2020, it seems counter-intuitive to close the door on what has been a successful vehicle for helping to purchase those new homes.
Help to Buy should not close in 2021
Davies says it is unclear why Help to Buy should not continue: “Forty three percent of all new build properties are currently dependent on Help to Buy, so the potential effect of any withdrawal would be significant, not just to developers and lenders, but also to consumers who may, in turn, see house prices increase.
“IMLA, along with many industry stakeholders, would welcome an announcement – or at least a firm indication – that some form of government support will continue post-2021.
“We would welcome discussions with government as to what that continuation might look like: some adjustments might be appropriate given the experience to date – but the impact which the scheme has had on new home ownership is surely too significant for it simply to be abandoned at this stage.”
The Scottish government’s Help to Buy scheme is to be extended for another two years from April 2019.
From April 2019 a further £100 million will be invested over two years, helping up to 4,000 households to purchase a new home. Since 2013, the scheme has supported more than 12,000 Scottish households into a new home.
Help to Buy (Scotland) is open to first time buyers and existing homeowners, and provides up to 15% of the purchase price of a new build home. The maximum purchase price is £200,000.
Scottish housing minister Kevin Stewart announced the extension to the scheme during a visit to Calderwood Village, Coatbridge.
Stewart said: “Since we introduced Help to Buy, the scheme has not only helped thousands of buyers into new homes – it has supported around 9,000 jobs. A third of the annual £50 million budget – £18 million – will be reserved for sales from SME builders, who were particularly affected by the drop in development finance after the financial crisis.
“We know house builders still see Scotland as a place to continue to develop and invest, with the latest figures showing new house completions grew by 5% over the last year. Housing is about more than bricks and mortar – we want to provide safe, warm homes, help create a fairer Scotland, and preserve a diverse and more resilient construction sector.”
Douglas Cochrane, chair of the UK Finance Scotland mortgage committee, said: “The extension of Help to Buy in Scotland is good news for buyers and home movers with low deposits, who will continue to receive vital support when buying a new-build home. Last year the number of first-time buyers in Scotland reached its highest level in a decade, boosted by vital schemes like Help to Buy.
“Today’s announcement will bring welcome stability to the Scottish mortgage market and help more people get a foot on the housing ladder in the years ahead.”