Equity loan Archives

Equity loan schemes seem to have a marmite-like quality: people either love them or hate them. The reaction to the recent announcement of a new scheme in England, Your First Home (YFH), saw both offered. In many respects judgement needs to be delayed until we see the detail in the late October Budget, as much turns on how tightly targeted the scheme is (income caps, price caps etc.) and on the charges that will be borne by households and developers.

The legacy of Help to Buy

The announcement was made shortly after the publication of a very favourable assessment of predecessor Help to Buy schemes (HTB ran from 2013 to 2023 in England) highlighting a net present social value of £25 billion based on the uplift in the value of the equity loans (in 2024/25 prices), an increase in new build of 15% and a boost to home ownership. On the downside, it estimated that there were modest price effects in some areas and that the new build premium was edged up, while around half the users of HTB indicated they could have bought a home without it. Broadly the scheme did meet its objectives of boosting the housing and mortgage markets (including levels of home ownership and developer viability after the Global Financial Crisis) but it seems its efficacy diminished over time, not least as the market recovery continued.

The case for bringing back equity loans

In many respects the battleground here is as much about politics as it is economics. YFH is seen by some as a diversion from the Government’s core aim to rebuild the social housing sector – in my mind a necessary but not sufficient focus of policy. However, it must be borne in mind that in the complex world of government accounting, the spend on this scheme will not count as day to day public expenditure as it is a Financial Transaction. Grant for social housing is capital expenditure, whereas an equity loan creates a financial asset: the Government expects to receive money back. This should largely offset the borrowing needed to finance them under its new debt measure, Public Sector Net Financial Liabilities (PSNFL). While this does not eliminate the financial risks, it means the scheme need not compete directly with social housing investment for the same fiscal resources. In that respect and reflecting the continuing concerns about diminished opportunities for younger households (and the wide political impacts that engenders) opting to return to an equity loan scheme makes a lot of sense.

Of course past performance is no guide to the future and because the UK has recorded house price inflation increasing in only nominal terms for some years, and is now seeing some real declines, it is possible that YFH borrowers could see both their 2.5% deposit lost and the government not fully recovering its equity loan. Such concerns must play a part in the thinking about how to target the scheme and what real impact it might have on the market. It could be quite limited. We also have to think about how loans are repaid and what impact that has on the capacity to make a next move. Currently unpublished Hamptons data suggests that HTB buyers have had to borrow more compared to other first time buyers moving to a next home – but for some that includes paying down any outstanding equity loan. Over the last five years FTBs on remortagaging and moving have borrowed on average 50-60% more, whilst HTB buyers doing the same borrowed an average of 50-85% more. These figures suggest that some Help to Buy borrowers have been able to remortgage or move while repaying their equity loans.

Making homeownership accessible to more people

While we are currently seeing high numbers of first-time buyers entering the housing market it should be borne in mind that many of them will be supported by the Bank of Mum and Dad. This has clear distributional impacts and if we are to avoid home ownership becoming ever more exclusive then schemes such as YFH are important part of the armoury, helping those with moderate jobs and credit but having limited savings get access to home ownership. And it should not stop there – we need to see further reform to shared ownership to allow it to properly fulfil its potential (and where at last we are seeing solid evidence to make the case from the Leasehold Advisory Service, Shared Ownership Resources and the Ministry of Housing, Communities and Local Government) and continued reform to mortgage lending rules, where further announcements are expected. Currently, lenders are restricted in the share of mortgages they can offer worth more than 4.5 times the borrower’s annual income. The limit has lagged behind the reality of a housing market where price appreciation has outstripped income growth, and is impacting upon a range of would be purchasers including those with low deposits and the self-employed.

If home ownership is to continue to play a key role in the UK housing system, it is important that effective “ladders” exist between renting and ownership, and this includes access to a suitable stock of housing, access to mortgages and – where necessary – access to help to bridge the gap between aspiration and effective demand.

Your First Home is no panacea, but it could make a valuable contribution.

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The Prime Minister couldn’t have been clearer to the Labour Party conference hall: he intends to end our broken housing system. Just as he said on the steps of Downing Street, he remains committed to ending rough sleeping. But he went further and more personal, sharing the legacy of his parent’s decent home in Keble Drive in Old Roan. How that home ensured his family could fulfil the aspirations that led him to that conference hall.

He outlined more policy on building council homes, helping councils access public land, reforming Right to Buy and restoring the quality of our social housing stock. He indicated going further on the Renters’ Rights Act, with new powers to allow councils to acquire rented homes from slum landlords.

It’s worth noting how his policies are now in complete contrast to the Opposition. Ahead of her own party conference, Kemi Badenoch pledged to end the requirement for developers to contribute to affordable housing when building their penthouses. She also committed to removing rules that made those homes easy to keep warm and cool in. As Burnham is showing how Labour can bring hope back, the Tories are embarking on a relentless raid on aspiration.

That said, there was one potential fly in the ointment of the Prime Minister’s vision for housing. He also announced the new Your First Home scheme, explaining it would “reduce the size of the deposit you need.”

On the surface, this seems an inherently sensible policy. Too many young families are stuck in the private rented sector – something which should be a choice has become their only option. Each month they pay their rent which, often, then pays off their landlord’s mortgage. Why not help them into ownership?

But is this scheme a new idea, or is it a reheated programme from the George Osborne era? And if so, how can past mistakes be avoided?

Is this Help to Buy 2.0?

In 2013, Help to Buy constituted £3.5bn of the government’s spending on housing, dwarfing all other measures. Most critically, it arguably contributed to the loss of 260,000 social homes over the following decad e by diverting away the funds that would have paid for more social homes.

Evaluations from the IFS and Shelter, have shown the failings of the scheme. The money often helped those ‘almost owning’ at the expense of the ‘almost homeless’. If Help to Buy’s 2013 spending commitment had been invested in social housing it could have resulted in around 35,000 new homes for homeless young people.

Help to Buy may have been a loan rather than a grant, intended to boomerang back to government coffers in the end, but it still took up most of the Cameron-era housing budget. Worse, as the loan was linked to the house prices, many of the supposed beneficiaries had to pay more for their loan as the scheme inflated their home’s worth without benefiting them. Some defaulted and lost their home.

But didn’t Help to Buy work?

A recent Government-led evaluation of Help to Buy, claimed the policy added value. But it is critical to know what question the paper was answering. It was tasked to see if Help to Buy added value in isolation of other policies. Yes, Help to Buy did subsidise some first time buyers. But that doesn’t make it a more efficient use of limited Government funds than other schemes would have been. When I eat a Mars bar, I take calories on board. It doesn’t mean that was the most healthy or efficient choice for my dinner or my budget.

Building our way to affordability?

Help to Buy made more sense if you look at the challenge the Cameron Government set itself. This Government, like many before it, has made a commitment to increase the raw supply of homes in this country over the kind of genuinely affordable homes needed.

The argument for raw supply has come from think tanks and developers, and think tanks funded by developers. It is a simple one – build more homes, and homes will begin costing less. But it doesn’t follow the logic of supply and demand. Last year, according to Savills, over 200,000 new homes were delivered in England. But there are almost 36 million dwellings in England. What happens to the price of goods when the supply of it is increased by 0.5%? Nothing whatsoever.

Homes don’t work like the iPhone. People rushing out to buy a fancy foldable model may well then put their old phone on Backmarket for thrifty folk to snap up at a discount. That’s not what happens when a Saudi investment company unloads its Mayfair property assets. They are traded off to someone else, holding or increasing their value, and over 170,000 children in England remain without a home.

Is the Government repeating past mistakes?

It’s clear the Labour Government is not suggesting a copy and paste of Help to Buy. Critically, they’re not betting the house on it. As Burnham’s speech made clear, Your First Home sits within an array of progressive policies to fix the Private Rented Sector and grow back our quantity of social homes. The offer will also have more sensible caps on who the offer is for based on their income as well as the price of the home it can be used on.

But this does not mean the scheme is without risk and not in need of careful thought. Taking on a mortgage with only a 2.5% deposit is something first time buyers should consider carefully, particularly in a time of global economic uncertainty and the risk of high inflation. In the end, this scheme’s role must be recognised as limited and specific. It’s clear this Government has the right ambition for solving our housing crisis, and because of that, the Your First Home scheme should always be seen as the support, not the headline, act.

Would you like to write for Red Brick? Email rose.grayston@gmail.com to pitch your piece (c.600-900 words)