Help to Buy set to bring down London rental prices

The early launch of the UK government’s second phase of its flagship Help to Buy scheme could drive average monthly rents in London down by as much as 5%, it is claimed.

With more people having access to loans with a much smaller deposit long term tenants are set to move out of rented accommodation in favour of buying their own home causing a glut of rental properties on the market, according to estate agency Chesterton Humberts.

The government announced last week that it was bringing forward the launch of the second part of Help to Buy, the scheme launched in April to help first time buyers onto the property ladder. The second part guarantees loans and will mean the average deposit dropping to around £11,000.

Chesterton Humberts is confident that the scheme will prove attractive enough to tenants to achieve the government's aim of encouraging them onto the housing ladder and out of rented accommodation. However, this will create more competition between landlords eager to secure good quality tenants and is likely to push average monthly rents down.

The opposite is expected for the sales market, as the scheme will bring more buyers into the market and increase the competition for properties, thereby pushing property values up. The impact is expected to be felt especially in areas of London popular with younger buyers and with a good stock of flats such as Docklands, Islington, Battersea and Fulham.

‘Whilst I am confident that Help to Buy will be of great benefit to a large number of first time buyers, I am concerned that many people are not fully aware of the details of the scheme and how it works. Before applying I recommend buyers to seek independent expert advice to make sure they understand the terms and conditions of everything that is involved,’ explained Richard Davies.

‘More landlords may find their tenants giving notice as they move away from the private rented sector and into home ownership. Dependent on the scale of first time buyers taking advantage of the Help to Buy scheme, this could seriously impact the number of rental properties coming to the market for re-letting which could in turn see rental levels fall,’ he added.

Help to Buy consists of two schemes designed to enable aspiring homeowners with deposits of just 5% to buy a property worth up to £600,000. Applicants for both schemes must live in the property as buying to let or as a second home is not allowed.

The first scheme was launched in April 2013 and only applies to new build homes worth less than £600,000 being sold by registered house builders. Through the scheme, buyers with a 5% deposit can apply for a government loan of up to 20% of the purchase price, thereby in effect giving the buyer a deposit of 25%. The buyer must then take out a mortgage from a participating lender to cover the balance of the purchase price.

The government loan is free of charge for the first five years, after which an annual fee of 1.75% of the loan is charged, rising annually by retail price inflation plus 1%. Borrowers can repay back some or all of the loan at any point, provided it is a minimum of 10% of the home's market value at that time.

The loan must be repaid in full when the home is sold or at the end of the mortgage period,  whichever comes first. When repaying the loan, the 20%, or however much is borrowed, will reflect the value of the house at that time,  not the original value at time of purchase.

For example, in the first year a buyer purchases a £300,000 property with a £15,000 (5%) deposit, a government loan of £60,000 (20%) and a mortgage of £225,000 (75%). In year six the buyer pays a £1,050 annual fee (1.75% fee of the £60,000 loan), which is payable monthly. In year seven the 1.75% fee increases by RPI  plus 1% each year, so if RPI stands at 3% in year seven, the fee will increase by 4% i.e. 1.82%. The buyer therefore pays a total annual fee of £1,092. In year eight the buyer sells property, the value of which has increased to £500,000, and must repay government loan at 20% of the sale price or £100,000.

The second part of Help to Buy was launched on 07 October 2013, three months earlier than originally planned, and applies to both new build and existing homes. It allows buyers with a deposit of as little as 5% to take out a mortgage with a greatly improved interest rate due to the government guaranteeing any mortgage borrowing above 80% of the property's value, thereby minimising risk for banks.

Lenders will be free to charge whatever interest rates they choose and the guarantee will only be valid for seven years.
For example, in the first year a buyer purchases a £300,000 property with a £15,000 (5%) deposit and a mortgage of £285,000 (95%). The government guarantees 15% of the loan (£45,000), allowing the buyer to access a better mortgage rate. In year eight the government guarantee expires and the buyer sells the property for £500,000, repays outstanding mortgage balance and can then use the remaining equity as a deposit for their next home.