Updated 03 December 2020
The Help-to-Buy ISA has been closed to new applicants since 2019, and another popular home-buying resource – the Help-to-Buy equity loan scheme – is also closing in the near future, with an end date of March 2023. But this double whammy for first-time buyers isn’t as bad as it looks. Article by Nick Green.
The Help-to-Buy equity loan scheme, introduced in 2013, has enabled people to buy new-build homes with only a small deposit (as little as five per cent), with up to 20 per cent of the property’s sale price covered by a government loan. This is an ‘equity loan’, which means repayable amount rises or falls with the home’s value, and is repaid when the home is sold.
The Help-to-Buy scheme will however become more restricted over the next few years, and will stop altogether in March 2023 unless the government extends it. Housing secretary Robert Jenrick has said that 'all options are on the table' when it comes to extending the scheme, but no decision has been made as yet.
Another source of help for homebuyers (for first-time buyers in particular) has been the Help-to-Buy ISA which closed to new savers on 30 November 2019. Existing account holders still hold savings in their Help-to-Buy ISAs, but must claim their 25 per cent bonus (payable on completion of a first home purchase) by 1 December 2030.
For nearly four years this ISA helped prospective first-time buyers save up a deposit, and despite some snags (such as the government bonus being paid only after the home has been bought, so it can't be used for the exchange deposit) it has made the task of home ownership significantly easier.
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More than 225,000 buyers have taken advantage of the help to buy equity loan scheme, and its popularity has soared over time – in the last quarter of 2018 it accounted for over 60 per cent of all new home purchases. To date it has been available for existing homeowners as well as first-time buyers, but from 2021 only first-time buyers will be able to use it.
The 2021 change will also see regional value caps being introduced. This means that the scheme will only be usable for homes below a certain price, and this ceiling price will vary from region to region. If you're considering help to buy, it's also worth looking at shared ownership to help you get on the property ladder.
Concerns have been raised that this will create ‘cliff edges’ in areas near regional borders, as argued in a report by property advisers Cushman & Wakefield. The report highlights the example of South Northamptonshire, which is officially in the East Midlands, but where home prices have more in common with the South East – 82 per cent of new home sales are already above the new cap level for the East Midlands. Cushman & Wakefield warn that this cap could lead to a 50-60 per cent drop-off in demand for new homes in South Northamptonshire. The report has identified a total of 24 local authorities where average new home prices are likely to exceed their regional cap, making the equity loan scheme unavailable to many buyers. This in turn could depress local housing markets, according to Jonathan Stickells, a partner at Cushman & Wakefield. He said, ‘This research shows how badly impacted locations will be without the residential life support of Help to Buy. A follow-on scheme from 2023 is essential to maintain the buyer demand levels required to bring forward anywhere near the 300,000 or so new homes the country needs every year.’
Not everyone will mourn the passing of the Help-to-Buy scheme. One of the main criticisms it has attracted is that it has artificially inflated the prices of new homes, so that the main beneficiaries have been the property developers. According to a 2017 report by Morgan Stanley, builders can = charge an extra 5 per cent for properties sold through Help-to-Buy. Another perceived drawback is that the scheme only applies to new homes, which do not appreciate in value as fast as older ones (because new builds can sell for up to 16 per cent more, but lose this premium after a few years, offsetting growth in the property market generally). Buyers of new-build homes may therefore be paying around 21 per cent more in real terms, and may find it takes longer to upsize to their next home.
Although there is as yet no replacement lined up for the Help-to-Buy equity loan scheme, the replacement for the Help-to-Buy ISA is already here. The Lifetime ISA (LISA) offers a similar 25 per cent bonus on savings, though since you can deposit more each year (and over a longer timeframe) the total bonus is potentially much bigger (up to £1,000 a year, over a maximum 32 years). The bonus is also payed at the end of each tax year – rather than on home completion – making it potentially more useful for first-time buyers. Savers can also invest as well as save in cash.
Despite its clear advantages, the LISA isn’t yet anywhere near as popular as the Help-to-Buy ISA. It’s only offered by 13 providers, and only three offer a cash-based LISA. Uptake among savers has also been slow.
One of the LISA’s disadvantages is that savers are penalised if they withdraw their savings before the age of 60 for any reason other than buying a first home. Whereas the Help-to-Buy ISA simply withheld the 25 per cent bonus if money was withdrawn for other reasons, the LISA inflicts a 25 per cent penalty – which wipes out the bonus and also takes an effective 6.25 per cent cut of the capital sum.
Another drawback for some is a £450,000 price cap on the home being bought. So although LISA savings could be put towards such a property, they would be hit by the 25 per cent penalty. In expensive areas such as London this makes a LISA potentially less useful.
The lack of competition among providers also means that interest on cash LISAs may not be as attractive as on Help-to-Buy ISAs. However, a stocks & shares LISA can potentially achieve higher growth.
Despite its drawbacks and somewhat confusing nature (LISAs are also a vehicle for retirement savings), the Lifetime ISA remains the fastest way to save up a home deposit, and should help to compensate for the loss of other Help-to-Buy vehicles.
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