Why the buyers Osborne helped on to the property ladder will soon fall off

The man behind ‘Help to Buy’, former Tory chancellor George Osborne, claimed the policy had helped hundreds of thousands of families get on the property ladder, supported thousands of construction jobs and made “billions” for taxpayers.

This is true for the developers, who saw profits rise by as much as 54pc, and the Treasury, which is now cashing in as interest piles on to the loans handed out to young buyers.

But the story is now unravelling for many families who bought into the developers’ glossy brochures and the Government’s billboard-sized adverts.

Having paid a premium of as much as £38,500 for their newbuild homes, Help to Buy owners are now facing surging interest rates on not one, but two loans. 

And the problem is getting worse. Between January and July this year, 4,854 Help to Buy households had fallen behind on repayments – up from 2,413 in 2022.

Wobbling house prices also mean they face the prospect of negative equity.

Help to Buy loans, which were launched ten years ago, are no longer on the table, but ministers know that they need to give first-time buyers a helping hand on the property ladder – especially with an election looming. 

At this week’s Conservative Party Conference, ex-housing minister Brandon Lewis said he finds it “embarrassing that for the first time in living memory there is no offer or specific package for first-time buyers”.

It is understood the Government is working on a potential successor, but, as Telegraph Money’s investigation has found, Help to Buy has left a far from glorious legacy.

‘A ticking time bomb ready to explode’

Help to Buy equity loans have been described by some as “a free lunch”, largely because no interest is payable on the equity loan for the first five years. But in the sixth year, a 1.75pc interest rate kicks in, which is compounded in line with inflation each year thereafter.

Borrowers also cannot pay off their equity loan in smaller chunks than half, or in full, and have to pay a solicitor each time they do this. In London, because the equity loan is double the size, borrowers can pay it back in quarters.

A borrower buying a £500,000 house in 2017 with a 5pc deposit outside London could take out a 20pc equity loan with the Government, and a 75pc loan with a mortgage lender to cover the remaining value of the house. 

If they fixed the commercial loan for five years at around 3pc on an interest-only basis, they would be paying back £937.50 each month. In 2022, this borrower would start to pay 1.75pc on the 20pc equity loan, and have to refinance their 75pc loan at a higher rate. If that higher rate were 6pc, then their monthly mortgage repayment would more than double to £2,020.

Marc von Grundherr, director of estate agent Benham and Reeves, said the Help to Buy “ticking time bomb could soon explode” as five-year interest-free periods come to an end and borrowers refix onto rates they simply cannot afford.

He added: “Unfortunately for those facing this Help to Buy spike in unaffordability, the options are limited. Many lenders are refusing to touch Help to Buy homes, while others require 10pc equity in addition to the deposit you originally placed. 

“This only really leaves you with the option to sell your home, but this will prove problematic for those who may have fallen into negative equity.”

Meanwhile, the Government has made a “tidy sum” off the £24.7bn in equity loans on its balance sheet, according to calculations by Benham and Reeves. 

In the East Midlands, equity loans have been most profitable. The average size grew from £51,218 to £60,138 – an increase of £8,920.

In the North West, loans have grown by £8,432, in the South West by £8,025 and in the West Midlands by £8,001.

The handout has only backfired for the Government in one region, London, where their 40pc share in the average property has fallen by £1,590.

A Government spokesman highlighted that 1.75pc is “significantly lower” than current mortgage products.

They added: “Supporting aspiring homeowners is a government priority and since 2010 over 860,000 first-time buyers have been helped into home ownership through government backed schemes.

“We know building more affordable homes is key, which is why we are investing £11.bn to build the affordable, quality homes this country needs. This has seen us achieve the highest year on record for affordable housing delivery, with a 17pc increase in starts compared to previous years.”

‘We can either pay an extra £900 a month or sell up to downsize’

In 2020, Daniel Hyatt bought a £450,000 three-bed in Guildford through the Government’s Help to Buy. He took out a £90,000 equity loan which has now grown to £105,000, and has been paying 1.8pc on a five-year fix with a mortgage lender.

The 32-year-old said he and his partner have been trying to save up to pay it off in full once the interest-free five years are up, but reckon there will definitely be a shortfall which adds to the main mortgage.

They have saved £50,000 so far, but now have a one-year old and are paying up to £1,500-a-month in nursery costs.

He said: “It is a genuine concern. I’m hoping that the value will drop down to what we bought it for so that we can afford to pay it off.”

If it drops below what they bought it for, the couple will fall into negative equity – making it much harder to exit the loan.

Mr Hyatt worked out that if he pays off the majority of the equity loan, and carries over £30,000 to his main mortgage, his repayments will jump from £1,090 to £1,970 based on a 6pc interest rate.

If he had not saved anything, the couple’s monthly payments would be going up to £2,400.

He said: “It’s not knowing what you might have to pay in two years which is really terrifying. We want to stay in this house, but I can’t see us affording anything bigger in a couple of years’ time. We’d probably have to downsize because of house price growth.

“It’s the fact it’s tagged as interest-free, but in reality it’s just another form of interest.”

New build premiums roughly twice what buyers saved in interest

Help to Buy was a lucrative opportunity for developers. For every one percentage-point increase in the fraction of Help to Buy properties they built, roughly 1pc would be added to their revenue.

Christian Hilber, a professor at the London School of Economics, wrote a paper which found that in London Help to Buy increased house prices by 7.94pc and had “no detectable effect” on construction volumes in supply constrained and unaffordable areas.

Meanwhile, he said it boosted developers’ revenues by 54pc. Turnovers averaged £540m, with profits of £64m.

“We estimate that the premiums paid for newbuilds in London were roughly twice the implicit government subsidy.”

In other words, borrowers paid double what they saved on interest upfront on inflated valuations. Based on an average house price of £484,716 in 2016, the London Help to Buy premium was roughly £38,500.

Professor Hilber said Help to Buy also pushed up the average price of an existing house in London by around £6,400 compared with those outside the capital, benefiting existing homeowners and landowners rather than young would-be-buyers.

He added: “The key design flaw – rising interest rates just at the worst time when the free interest rate-period ends – is just one of the many flaws of the scheme. I said at the time that it was a really bad idea, highlighting the lack of an exit strategy.

“I don’t think the Government anticipated interest rates could be much higher when the five-year period ends. Rather than help young borrowers, the Government has created a very difficult situation. 

“These buyers already paid upfront the equivalent of the subsidy and more in the form of higher house prices. Now, they have this massive headache of increased financing costs plus the equity loan interest that starts to kick in.”

The professor also said while the glossy brochures explained what would happen when prices rise, they “did not even consider” the possibility of falling prices.

‘Developer profits have misled us on house price inflation’

Some academics worry that the construction data fed into the UK’s monthly inflation figures is skewed, because the Office for National Statistics cannot separate out developers’ profits.

Simon Roberts, honorary professor at Brunel University, said this makes it impossible to know how much house prices have actually grown.

He said: “We’re not removing profit because we can’t work it out, so we could be overstating inflation. Land costs are actually going down per house. 

“Developers are taking the temperature of the market and then adding a bit. It’s not much more complicated than that.”

Profits per dwelling for developers rose £75,000 between 2000 and 2019, according to Brunel University’s calculations.

After the financial crash, Professor Roberts said shareholder-focused firms came into the construction sector and took over developers. Their job was to push down costs and maximise profit, he said, all-the-while dishing out big bonuses to directors.

The professor added: “This has meant building to bare building regulations and drip feeding products onto the market, so they achieve a profit just short of oversupply.

“Developers have no interest in building more than the 200,000 houses they finish each year. They’ve found the rate they can put houses on the market. They don’t want to sell them more cheaply and make less profit.

“I find it appalling that those who paid this new build premium are now having to stomach rising rates. It’s a black cloud with silver lining either way round. Pay more on a bigger loan, or potentially face negative equity.”

Responding to the academic data, Home Builders Federation director Steve Turner said developers have invested in the sector at an “unprecedented rate” – with house building peaking at 250,000 over the past decade. 

The trade body blames an “anti-development policy environment” for recent declines in numbers. 

Mr Turner added: “Assessing the drivers that determine housing delivery is complex, but needs to be based on facts not politically driven, anti-business rhetoric aimed at securing media coverage.”

First Homes scheme ‘better for buyers but costs Govt too much’

One Government initiative experts hail as working more in the borrowers’ favour is the First Homes scheme.

It allows first-time buyers to purchase a home for up to 50pc less than its market value, a discount which is funded by developers. The home can be a newbuild or an existing home.

A buyer needs to be able to qualify for a mortgage for at least half the price of the home, and have a household of income of £80,000 – or £90,000 in London. Some councils are allowed to prioritise essential workers, local and lower income families for this scheme.

Anna Clarke, director of policy and public affairs at The Housing Forum, said this model “won’t create any problems for buyers down the line, because it’s a shared equity scheme where the buyer only ever usually owns 70pc of the property”. 

She added: “When they sell, they have to sell on to another first-time buyer who meets the eligibility criteria. They also only own 70pc. 

“But this obviously costs the Government more money, as they’re never going to get any return on the money they put up to fund the remaining share. This means the availability of First Homes has been much more restricted than Help to Buy.” 

Following an initial small-scale pilot, the Government aims to deliver up to 1,500 ‘First Homes’ across by the end of this year. In March, 775 First Homes had been delivered.