The Help to Buy scheme was introduced by the UK government in 2013 to assist people with buying their first home or moving up the property ladder.
The programme aimed to make purchasing a home more affordable for buyers by providing an equity loan that reduced the deposit and mortgage required.
In the blog below, we’ve explored the Help to Buy scheme, its benefits and downsides, why the UK government introduced it, and current alternatives.
What is the Help to Buy scheme?
The Help to Buy scheme, with its two main options, was a game-changer for home buyers.
Option 1: The Equity Loan
The first option, an equity loan, was a standout feature. Here, the government lent up to 20% of the property price, boosting the buyer’s deposit.
This meant buyers only needed a 5% deposit and a mortgage for 75% of the value. The equity loan was also interest-free for the first five years, a significant advantage.
Option 2: The Mortgage Guarantee
The second option was a mortgage guarantee, where the government acted as a guarantor for mortgages on newly built properties.
This enabled lenders to provide mortgages requiring only a 5% deposit from the buyer, as the government covered some of the risk. This scheme supported buyers who could raise a 5% deposit but did not qualify for an equity loan.
Estate agents often supported people getting onto the property ladder via this scheme.
Is the Help to Buy scheme still active in England?
As of 2022, the Help to Buy equity loan scheme has closed to new applicants in England, a crucial update. The mortgage guarantee scheme has also ended in England.
However, in contrast, the Help to Buy-Wales scheme is still operating in 2024 and accepting new applicants.
The equity loan arrangement is available on newly built homes until April 2025, a significant difference.
Therefore, neither Help to Buy scheme will be active for new property purchases in England in 2024. The programmes temporarily stimulated the housing market after the financial crisis.
Alternatives to the Help to Buy Equity Loan
While the Help to Buy equity loan is no longer available in England, first-time buyers may want to consider other options.
Shared Ownership
One such alternative is shared ownership, a detailed alternative that allows you to purchase a share of a property (between 25% and 75% of the home’s value) and pay rent on the remaining share.
This can be a great way for buyers to get on the property ladder when they can’t afford the entire mortgage on a home.
Your household income must be less than £80,000 outside London to qualify.
Another important detail is that shared ownership allows you to slowly increase your share in the property as your finances allow.
Lifetime ISA (LISA)
Another option is the Lifetime ISA (LISA), which was launched in 2017. This account lets you save up to £4,000 per year, and the government will add a 25% bonus.
So if you contribute the maximum each year, you’ll receive £1,000 in free bonus money. You must be between 18 and 40 to open a LISA.
You can use the money towards a first home purchase worth up to £450,000 or withdraw it for retirement after age 60. The LISA has more flexible rules than Help to Buy, with no maximum household income cap.
Additionally, you are not limited to only purchasing a new-build home like many other schemes and programmes. However, if you withdraw the money for any other reason, you’ll lose the government bonus and pay a penalty.
Is the Help to Buy scheme active in Wales?
Unlike England, the Help to Buy – Wales scheme is still operating in 2024 and accepting new applicants. The equity loan arrangement is available on newly built homes until April 2025.
Under Help to Buy – Wales, buyers can borrow up to 20% of the property price from the Welsh government. This means purchasers only require a 5% deposit and 75% mortgage to buy their home. Maximum property price caps are in place, which vary across Wales but are mostly £300,000.
So, first-time buyers and some existing homeowners in Wales can still benefit from an equity loan until April 2025, giving them an affordable route to homeownership. However, Help to Buy has closed to new applicants in the rest of the UK.
Why was the Help to Buy Scheme Introduced?
The Help to Buy programme was introduced in 2013 when the UK housing market struggled to recover from the financial crisis and recession. House prices had fallen significantly during the downturn, which led to banks and building societies cutting back on mortgage lending.
First-time buyers found it difficult to get onto the property ladder, as most lenders required large deposits of 10-20%. Raising such substantial deposits was unrealistic for most buyers.
The Help to Buy equity loan scheme aimed to make purchasing a home more feasible for creditworthy buyers who could not save massive deposits. Providing an interest-free loan for part of the value reduced the deposit required.
The mortgage guarantee element encouraged lenders to offer 95% loan-to-value mortgages again, supporting buyers with smaller deposits. The government backing reduced the risks to lenders.
So, the Help to Buy programme enabled more people to buy their first home or move up the market by making higher loan-to-value mortgages accessible. This also stimulated new housing construction, creating jobs and supporting the economy.
Advantages and drawbacks of the Help to Buy scheme
The Help to Buy scheme had various advantages, downsides, and risks.
Advantages
A Step Onto the Property Ladder for First-Time Buyers
The Help to Buy scheme was a beacon of hope for many first-time buyers, offering a lifeline to the property ladder when they otherwise would have struggled to buy.
It allowed purchasers to buy with just a 5% deposit, providing significant relief from the burden of significant upfront costs. This was a game-changer for many, making the dream of homeownership a reality.
Encouraged New Housebuilding
The Help to Buy scheme also significantly stimulated housebuilding, effectively increasing the supply of new homes. Some analysts believe that without Help to Buy, the market would have stagnated further after the financial crisis. This paints a picture of a more vibrant and dynamic housing market, a positive outlook for the industry.
Disadvantages
Inflated Property Prices
However, critics argued that the scheme inflated property prices, especially in areas of high demand. The extra purchasing power it provided buyers may have artificially driven up values.
Encouraged Buyers to Take Financial Risks
While the Help to Buy scheme had its merits, there were also valid concerns. Some buyers may have overstretched their finances due to overvaluing the affordability offered by Help to Buy. Acknowledging these concerns and learning from them for future housing policies is important.
The ending of Help to Buy in England has reduced these risks. At the same time, Wales has retained into 2025 to keep homeownership accessible for residents.
Why are Help to Buy applications stopped in England?
The government always intended the Help to Buy programme to be a temporary measure to kickstart the housing market again after the financial crisis. It was not designed to provide long-term assistance. The government has now decided to close the scheme, which was done in phases.
No new applications have been accepted since October 2022.
By 2022, the English housing market had rapidly recovered, with rising demand and property prices. Affordability issues remained, but banks were lending at high loan-to-values again.
Therefore, the government decided Help to Buy had achieved its aims and was no longer needed to underpin the market in England.
Keeping it open posed unnecessary risks in an already buoyant market. Rising concerns that Help to Buy may have been inflating prices rather than making homes more affordable also contributed to the decision.
Ending the scheme also saves substantial public money, as it was forecast to cost a further £10 billion if it ran until 2023.
The government is now focused on other housing policies like the new First Homes scheme, which assists buyers differently. This provides properties to first-time buyers at a 30% discount but with eligibility criteria. You can learn more about your Help to Buy options in 2024.