|Help to Buy has dominated the headlines for the last six months and fuelled talk of a housing bubble. Important details on the pricing of mortgages under the indemnity part of the scheme emerged last week and help us assess the attraction of the scheme to would-be buyers.
The majority of first time buyers are renters. While household incomes have flat-lined in the last 4 years, rents have risen steadily. On a national basis the monthly cost of renting a 2 bed property is 18% more than the cost of buying with an 80% loan to value mortgage – the current average for a first time buyer. The inability to raise a 20% deposit without the aid of external parties, such as family, is a key barrier to accessing home ownership.
The greatest attraction of the second part of the Help to Buy scheme is the ability to buy a property with a much smaller deposit. For the average 2 bed home nationally the required deposit will drop from £27,000 (20%) currently to £7,500 (5%).
What has attracted less focus, and has a much greater bearing on the take-up of these mortgages, is the monthly cost of buying with a 95% mortgage at a 5-5.5% mortgage rate. In particular, how this compares to the cost of renting a similar sized property.
Our analysis suggests that buying a 2 bed home with a 95% Help to Buy mortgage would cost 22% more per month than renting on a national basis. The increase is 31% in higher value markets such as London. The chart below shows the differential between renting a 2 bed home and buying with a 95% mortgage at 5%. Indeed, across all regions Help to Buy is also around 5% higher than rental values at the top 25% of the market.
Fig 1: Renting and buying under Help to Buy (2 bed property)
The current pricing of Help to Buy mortgages means the scheme is likely to appeal to those first time buyers on the highest incomes. This is likely to limit actual levels of take-up under the scheme. Furthermore, while lenders may sign up to the scheme overall lending at 90-95% LTV accounted for just 1.8% of all mortgages in the last 12 months. The appetite of lenders to grow lending volumes at this end of the market is another important consideration even with the availability of the mortgage guarantee.
In the near term the publicity and awareness around the scheme will appeal to a sizable group of would-be buyers. This is likely to push up housing demand in the coming months which will put further upward pressure on prices.
How much of this demand translates into actual Help to Buy sales remains to be seen. The reality is that a small but growing proportion of would be buyers are already starting to benefit from greater competition between lenders at up to 90% LTV. A standard 90% LTV mortgage at 4% mortgage rate would require a £15,000 deposit but the monthly costs would be less than 10% higher than renting.
All the focus on Help to Buy has largely masked what is a housing market recovery borne from improving consumer confidence and low mortgage rates. Home buyers who can raise a deposit have more housing buying power now than at any time previously. This is where the real potential exists to drive demand and push house prices. The publicity around Help to Buy is likely to be doing more to stimulate the housing market than the direct impact of the product itself.