Help to Buy scheme explained: can you still take part?


Housing market confidence growing

The Help to Buy scheme was announced with much fanfare by the chancellor in March 2013. It was set up to help those struggling to get on the property ladder buy a home with just a 5% deposit.

A year on, there are claims that the scheme has priced out more first-time buyers than it has helped, by fuelling house prices. The head of the Bank of England, on the other hand, says it's not driving the housing market. What are the pros and cons of the scheme, and how can you take part in it?

The first part of the government-backed initiative, which offers first-time buyers and home movers on new-build homes in England an interest-free loan from the government, went live last April. It looks good on the face of it, but has attracted much criticism. Critics claim the programme is inflating property prices, with one City economist calling it a "moronic policy". Note also that if a home buyer defaults on a loan, the taxpayer is on the hook for some of the losses.

The second part, which came into effect in October, is even more controversial. It offers a taxpayer-backed guarantee to lenders who offer mortgages worth up to 95% of the property's value. Economists fear this could store up problems for future generations.

How it works
The first part of the scheme: You'll need to contribute at least 5% of the property price as a deposit. The government will give you a loan for up to 20% of the property price, and you need a mortgage of up to 75% to cover the rest. So, for example, if you want to buy a home worth £200,000, you need to save up a deposit of £10,000. The government will lend you £40,000 and you will have to get a £150,000 mortgage. For more details, click here.

It's only for properties worth up to £600,000 and you can't sub-let your home. You also have to buy your home from a registered Help to Buy builder. You should contact the Help to Buy agent in the area you want to live in, who will have a list of builders for you to choose from.

You can sell your home at any time because it will be in your name, but you'll have to pay back the loan when you sell or at the end of the mortgage period – whichever comes first. You can also pay back some or all of the loan without selling your home.

The first part of the programme has given a much-needed boost to housebuilding and lifted consumer confidence to some extent. House builders are delighted, naturally. It can be argued that Help to Buy isn't the only factor driving up house prices - the economic recovery and the ongoing shortage of homes on the market also play a role.

If you can afford to buy at current house prices, Help to Buy is certainly worth looking at. But bear in mind that you will be taking on a lot of debt.

But with the housing market taking off again, many of the people the scheme is aimed at simply can't afford to buy. The programme has been derided as a subsidy for the housebuilding industry.

The first phase, by encouraging new homebuilding, should at least boost supply, but the second phase will not even do that. By bringing new borrowers into the market it will simply boost demand, driving prices higher still.

The second part of the programme is likely to keep house prices very high, which will make it even tougher for future generations to be able to afford a roof of their own over their heads, and ensure huge swathes of income are spent on housing.

Albert Edwards at Société Générale slammed Help to Buy as a "moronic policy" and one of the "most stupid economic ideas" of the past 30 years. He said it was stopping house prices from falling to more affordable levels. By burdening young people with even more debt the scheme was driving them into "indentured servitude".

The affordable housing campaign group PricedOut worked out that Help to Buy has helped only 18,875 households to purchase their own home, but by driving up prices made home ownership an unaffordable dream for 245,000 other people who could have afforded it before the programme came into effect.

Former Bank of England governor Sir Mervyn King insisted, while still in office, that the scheme must remain temporary. He was worried that it was "a little too close for comfort to a general scheme to guarantee mortgages" and thought Britain needed to get back to the healthy mortgage market it had before the financial crisis.

His successor, Mark Carney, has been more cautious. He recently said that the scheme was still pretty small, all outside of London and as it's for lower-priced houses and first-time buyers, was not driving the housing market. When asked about the spiraling London market, he pointed out that much of it isn't mortgage-driven, but cash-driven – as the top end is dominated by cash buyers, many of them from abroad.

The International Monetary Fund also warned last spring that Help to Buy risked achieving the opposite of what it set out to do. "In the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing."

The second part of Help to Buy could be a real money-spinner for the Treasury. It could receive annual revenues of nearly £12b billion a year. BBC business editor Robert Peston explains how.