Help to Buy Scheme Generates £1.74 Billion for UK Government, Future Gains Threatened by Falling Flat Prices

The UK government has generated £1.74 billion from the Help to Buy equity loan scheme, according to new data. The scheme, which closed to new applications in March 2023, provided loans of up to 20% of a home's value (40% in London) to assist first-time buyers, with buyers contributing 5%. The government's profit came from loan repayments, which were based on the property's value at the time of repayment, not the initial loan amount, and also from interest payments.

As of March, the scheme had generated a £1.24 billion profit from loan repayments by 214,000 individuals who had settled their loans, with an additional £500 million from interest payments, as detailed in the annual report from Homes England, the body managing repayments. The loans were interest-free for the first five years, after which buyers could either pay interest or buy out the government's stake, though the full loan had to be repaid upon selling the property.

Impact of Falling Flat Prices

Despite the overall profitability, future gains from the Help to Buy scheme are likely to be curtailed by a significant decline in flat prices. The typical flat price fell by 5.3% in the 12 months to March, from £199,186 to £188,643, according to Land Registry data. More recent statistics suggest that the average flat owner sold their property for £39,509 less than they paid in the past year. Homes England acknowledged this market trend, noting in its report that the Help to Buy portfolio is "particularly sensitive to market risk from changing house prices." The report indicated a £438 million decrease in net fair value gains on financial assets, primarily driven by a reduction in the estimated value of properties within the Help to Buy equity loan portfolio, with falling London flat prices identified as a "source of additional market risk."

This downturn presents challenges for homeowners who used the scheme. If property values fall, buyers may struggle to repay their loans or find themselves in negative equity, potentially being unable to remortgage if their equity falls below the required threshold after repaying the government loan. While this could lead to higher interest income for Homes England, it would not compensate for the reduced income from loan redemptions.

The Help to Buy scheme has also faced criticism for potentially inflating house prices. Concerns have been raised that developers may have increased prices for new-build homes, knowing that buyers could access government equity loans. Buyers of new-build flats, in particular, might now face difficulties selling their properties due to the struggling flat market and issues associated with leasehold apartments.

Calls for a New Scheme

Despite its criticisms and the current market challenges, some property experts are advocating for a revived version of Help to Buy to support aspiring homeowners. Housing Minister Matthew Pennycook has reportedly faced discussions within his department regarding the scheme's reinstatement, though no concrete plans are in place. Financial advisers suggest that a new iteration of the scheme could provide a much-needed stimulus to the housing market, especially in the absence of significant interest rate cuts. Some propose that an expanded scheme could include second-hand homes, which could help to distribute demand more evenly, ease pressure on new-build prices, and offer buyers a broader selection of properties. A report by the Institute for Fiscal Studies earlier this year suggested that the original Help to Buy scheme had a limited impact on social mobility, largely benefiting more affluent buyers.