First-time buyers (FTBs) are said to be the lifeblood of the housing market, and saving for a deposit is commonly stated as the biggest obstacle they face. Hence there are various government schemes aimed at reducing the amount of money FTBs must put into their purchase.
Help to Buy (HTB) was one such scheme, which closed its doors to new applications on 31 October last year. The government is yet to announce a plan to replace HTB but there are mixed opinions within the industry as to whether this is needed.
Mortgage Advice Bureau national new homes account director Mobeen Akram says: “While we mourn the loss of HTB, it’s gone and it’s not coming back.
Anyone turning to this Lisa money while life is tough will pay a horrible price
“HTB was a successful and popular option for many buyers as it lowered the loan-to-value [LTV] rate, which meant buyers had to borrow less to get onto the property ladder.”
Carl Summers Financial Services financial adviser Scott Taylor-Barr suggests there isn’t a “natural successor” to help FTBs onto the property ladder, which he describes as “a shame”.
He adds, however: “It is very difficult to design and implement any form of scheme that can and does help the right people while also not driving up property prices artificially.
“Property in the UK is too expensive as it is. The last thing we need is further price growth driven by millions of pounds of taxpayer cash, or we risk ending up with a property market that is reliant on government subsidies to function.”
Alternatives
Although it is yet to be confirmed if the government will launch an HTB replacement, other FTB schemes are available. These include First Homes, Deposit Unlock, Shared Ownership, Mortgage Guarantee Scheme, HTB Isa and Lifetime Isa (Lisa).
The chain gets stronger only if the first link has a strong support system. I hope we see that drive for strength reflected in new incentive schemes
Akram suggests that these schemes, “while strong in their own right, can’t compete with the HTB scheme”. All the initiatives have their own benefits and drawbacks.
She says: “Only a limited number of properties are included in the Deposit Unlock scheme. It can get more expensive to buy shares in properties with Shared Ownership, and the First Homes scheme tends to be restricted to local areas.
“The pros outweigh the cons for each, and it depends on a buyer’s circumstances as to what is going to work best for them.”
‘Not fit for purpose’
Leeds Building Society director of mortgage distribution Martese Carton says, although the efforts of the government to support FTBs to save for a deposit are welcomed, the schemes created for this purpose “need urgent reform”.
We should not penalise savers for trying to keep to the original intent of these schemes
One example of this is the Lisa, which Carton says is currently “not fit for purpose”.
Opening a Lisa allows FTBs aged 18 to 39 to save up to £4,000 a year, getting a 25% boost when used to purchase a qualifying first home. This can result in a bonus of up to £1,000 a year, on top of individuals’ savings and interest.
The Lisa’s maximum eligible property value has not increased from £450,000 since the product was launched in 2017, even though average UK property prices have risen by 35% in that time. According to MoneySavingExpert (MSE), if the threshold had risen in tandem, the eligible property value would now be £607,500. Nevertheless, half a million people have put money into a Lisa.
Of the HTB Isa, Hargreaves Lansdown head of personal finance Sarah Coles says: “FTBs have been hamstrung by the limit on property values. House prices have soared 44% since the scheme was introduced, leaving the £250,000 limit in the dust.
It is difficult to design and implement any form of scheme that can and does help the right people while also not driving up property prices
“The savings scheme could become worthless for thousands of savers and, although the Lisa limit is much higher, unless the government rethinks how these limits are set, over time it risks a similar fate.”
Coles suggests a “sensible option” would be for the government to link limits to house-price inflation. This means “buyers have the security of knowing that, however long they save for and however house prices move in the interim, they will be protected”, she explains.
Penalties
Coles also calls on the government to reconsider the 25% penalty that Lisa savers have to pay if they buy a property worth more than £450,000.
It always seemed to me that the HTB Isa was a hasty addition to the government’s HTB scheme
“It’s ludicrous that people should be penalised for trying to do the right thing and be hit by forces out of their control.”
Lisa savers also face a 25% penalty to withdraw cash before the age of 60 for any other reason than buying their first property.
Coles says: “While it may look like you are just giving up the government bonus, it’s more complicated than that because it also takes a chunk of the money you have invested [£6.25 of every £100].
If you had put £4,000 into your Lisa, you would receive the 25% government top-up, which brings the sum of your Lisa up to £5,000. If you then withdraw that £5,000, you will pay 25% on that, which comes to £1,250, so you are eating into your savings.
It means anyone turning to this money while life is tough will pay a horrible price for having tried to do the right thing.”
It can get more expensive to buy shares in properties with Shared Ownership
MSE data suggests that some 155,600 Lisa savers withdrew money for reasons other than to buy a qualifying first home between April 2017 and April 2022, forfeiting £9.5m of their own cash in penalties.
Coles urges the government to cut the Lisa penalty to 20% “to help people use their money in the way that makes most sense for them, without losing some of their own savings at a time when they can least afford it”.
She adds: “We should not penalise savers for trying to keep to the original intent of these schemes, particularly with the current cost-of-living challenges that mean they may need to access their savings, with bills continuing to climb.”
Oportfolio content and communications manager Louis Mason [see Broker Focus, p30] believes the Lisa will not suffer the same fate as that of the HTB Isa.
FTBs are an intrinsic part of the housing chain. Nurturing them as they enter the property market is the key to a more successful industry in years to come
“It seems the Lisa is a much more sensible and thought-out savings initiative,” he says.
“It always seemed to me that the HTB Isa was a hasty addition to the government’s HTB scheme as a way of lenders adding a bit more validity to their savings accounts. They didn’t really consider the buyers they would be attracting and the types of properties that were going to be built and bought.
“The upper limit of the Lisa being £450,000, and the maximum monthly deposit being £4,000, is more sensible than the HTB Isa.”
However, Mason thinks there are “issues” with two elements of the Lisa, and “the government needs to reconsider”.
Only a limited number of properties are included in the Deposit Unlock scheme
The age limits of 18 to 39 for setting up a Lisa are “a little bit on the strict side”, he says, because the average age of an FTB in the UK is steadily approaching 40. He also thinks the “harsh” 25% charge hanging over Lisa savers for withdrawing their own money can serve only to discourage saving.
Private-sector options
Government FTB schemes aside, Building Society Association head of mortgage and housing policy Paul Broadhead highlights a range of private-sector solutions to help with deposit/guarantor or equity loans, such as Proportunity, Ahauz, OnLadder, MarketMortgage and Generation Home.
Under MarketMortgage the lender provides a mortgage at 85% LTV, with an investment bank topping up the loan with a layer of 10% LTV. The borrower then provides a 5% deposit.
The last thing we need is further price growth driven by taxpayer cash
The same company also offers an Own New solution, which provides FTBs with a 95% LTV mortgage for new-builds. The solution is open to all lenders, but the initial partner is Darlington Building Society. There is no additional cost to borrowers, and housebuilders pay a small fee after completion.
Another example is Generation Home, which offers — alongside other solutions — an income booster product. This allows up to five family members to be added to the mortgage to boost income levels, with all jointly liable for the loan. The boosters can be removed at the time of the remortgage, subject to affordability.
Support system
Akram says FTBs are an “intrinsic part” of the housing chain, and “nurturing them as they enter the property market is the key to a more successful industry in years to come”.
The pros outweigh the cons for each scheme, and it depends on a buyer’s situation
She adds: “After all, those FTBs become second steppers, then seasoned homeowners, and so the cycle continues. This cycle is instrumental in continuing the chain of homeownership.
“While many buyers need support — and we’ve seen plenty of housebuilders changing their product remit to middle-market homemovers — we must still ensure we’re supporting the FTB market. The chain gets stronger only if the first link has a strong support system, and I hope we see that drive for strength reflected in new incentive schemes.”
This article featured in the April 2023 edition of MS.
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