The government has announced that it’s extending the deadline for purchases completed through the old version of the Help to Buy scheme.
Purchases through the old scheme (which closed for applications on 15 December) now need to be completed by the end of May, giving homebuyers an extra two months on the original deadline.
What is the Help to Buy scheme?
First launched in 2013, the Help to Buy scheme was designed to boost the building of new homes while helping people to get on the property ladder. Available in several different forms, the most popular version is a government loan of up to 20% (or 40% within Greater London) on the value of a new-build home. This essentially allows people to buy a new home with a 5% deposit and a 75% mortgage.
The loan is interest-free for the first five years and must be repaid within twenty-five years (or sooner if the property is sold). It’s an equity loan, meaning that the amount someone repays is based on the sale value of the property. So if they take out a loan on the full 20% of the purchase price, then they will need to repay 20% of what they get when they sell it on.
Why is the Help to Buy scheme ending?
The Help to Buy scheme isn’t actually ending full stop, but it’s been relaunched in a different form and will be restricted to first-time buyers. The system of price caps has also changed. Previously the cap on the value of an eligible property was £600,000, but there are now regional price caps on the properties someone can buy with a Help to Buy loan, ranging from around £186,000 in the north east to £600,000 in London. The new system opened for applications on 16 December and the loans will become available on 1 April 2021.
The Help to Buy scheme has been a bit divisive over the last seven years. While it has genuinely helped many people afford properties, there’s no escaping that the big winners have been the major housebuilders – who have been able to jack up their prices safe in the knowledge that the government will step in to pick up the difference. Some have accused the scheme of fuelling rampant house price growth (especially in London), and there are also some fairly serious concerns about whether it leaves the taxpayer vulnerable. The scheme has tied up more than £16 billion of government funds in the uncertain clutches of the housing market, and it remains to be seen whether this has been a good investment – particularly when the cladding scandal has rendered large numbers of new-build flats completely unsellable.
A 2019 report from the National Audit Office found that around two thirds of people using the scheme could have afforded houses without it, and that one in twenty-five households taking out the loans had a household income of more than £100,000 a year. In this context, it’s reasonable to ask whether Help to Buy was in many cases just giving already quite wealthy people cheap loans to buy extravagant houses, artificially inflating house prices and encouraging housebuilders away from more affordable homes.
Whatever the case, the system was long due an overhaul, but unfortunately the timing has left a lot of people in a mess.
Why has Help to Buy needed extending?
The problem lies with building delays caused by the COVID-19 pandemic. While builders have been allowed to work on through the various lockdowns, their work rate has still been hit by various setbacks. Localised outbreaks have seen whole teams of workers forced to self-isolate, while there have also been significant problems with suppliers and other logistics. All of which means that some of the homes that people have agreed to buy simply won’t be ready by the time the Help to Buy scheme was originally due to end.
Many people with Help to Buy purchases in the pipeline won’t qualify for the new scheme. Without the extension, they would need to find a 25% deposit instead of 5%, and an estimated 16,000 property purchases would be at risk of falling through. If the purchases do fail to go through by the deadline, builders will be obliged to let people out of their contracts without any fees, but some smaller developers may begin to have serious cash flow problems, and the buyer will still have to pay the legal fees they’ve run up so far.
The government has been clear that the deadline will not be extended further, so builders still need to get a move on, but with any luck it will buy thousands of people enough time to save their dreams of a new home.