Help to Buy scheme out of reach of lower earners, say researchers

Resolution Foundation finds low and middle-income families can't afford mortgage guarantee across two-thirds of Britain

Low to middle-income families are unlikely to be able to use the government's flagship Help to Buy scheme across two-thirds of Britain, since the monthly mortgage repayment costs would be too expensive, new research shows.

The Resolution Foundation thinktank found that even with rock-bottom interest rates, the leap from renting to home ownership will be "too great a stretch for low and modest-income groups," in an analysis examining the prospects for the scheme designed to help aspirant home owners find the deposit to buy a property.

Vidhya Alakeson, the thinktank's deputy chief executive, said: "The aspiration to own a home remains strong among millions of families but the growing gap between renting and traditional home ownership is too great for many, especially in London, but also in hotspots across the country like Exeter, Cambridge and Aberdeen."

Help to Buy, which was championed by David Cameron's aides as pivotal to his re-election chances, offers a government guarantee on mortgages of up to 95%. The scheme applies to any property worth up to £600,000.

The thinktank found that a couple with one child with a net income of £22,000 would struggle to afford the monthly payments on a 95% mortgage for a two-bedroom home in two-thirds of all local authorities. These local authorities with high-priced homes are predominately in south-west, south-east and eastern England and the East Midlands.

In Cambridge, the couple would have to spend 85% of their net income (£1,557 a month) on meeting the costs of a 95% mortgage. In the London borough of Hounslow, the couple would have to spend 76% of net income (£1,395 a month). In Exeter, a couple would have to spend 53% of net income (£970 a month) and in Aberdeen, they would have to spend 50% of net income (£918 A month).

The Resolution Foundation said that if someone with low earnings of £22,000 a year is having to pay more than 35% of their post-tax income on a mortgage it is unlikely to be affordable. The thinktank suggests this is likely to be the case in 71% of local authorities.

The financial analysis led the thinktank to conclude that for this lower-income group the government should expand a system of shared ownership. Its report argues that this "could act as a bridge between renting and owning, offering low and modest-income households a route to home ownership that is more affordable and much lower-risk than a conventional mortgage".

Under shared ownership, the purchaser buys a share of the property title on a leasehold basis and pays rent on the unowned share to a housing association which owns the remaining share.

The initial share can be between 25% and 75% of the value of the property. The share that is owned is usually purchased with a mortgage.

However, the deposit requirement is based on the value of the share purchased, not the entire property. For example, a 25% share requires a 10% deposit based on the value of the share.

A couple with one child with a net income of £22,000 would, for instance, be able to afford a 25% share of a two-bedroom home under shared ownership in 87% of local authorities in the country.

The report's authors argue shared ownership should no longer be seen as a form of social housing but should be seen as a product for less well-off first-time buyers. Alakeson said: "Shared ownership must enter the mainstream, becoming the fourth tenure in the UK – alongside traditional ownership, private and social renting – as it breaks down the barriers between renting and owning for low and modest-income families."

It argues that without an increase in the scale of shared ownership and greater flexibility in how the product works, over time a significant gap in asset ownership as well as home ownership will emerge in the UK.

Shared ownership funded with a government grant is currently open to households on incomes below £60,000 outside London and below £66,000 or £80,000, depending on house size, for families in London. Although many fall into this category, there are only 174,000 shared ownership properties in England and the tenure houses only 1% of working-age households.

This is largely because most shared ownership is delivered through Section 106 requirements placed on builders involved in residential for-sale developments.

Cameron announced this month that 2,384 people had been accepted for a mortgage under the second phase of Help to Buy. However, of these applications, just 10 had been completed. Only Halifax and the Royal Bank of Scotland are currently offering 95% mortgages for the second phase, with other lenders, including Barclays, Santander and Virgin Money, to begin next year.

But although many of the major banks have signed up, building societies – a traditional avenue for prospective home-buyers looking for mortgages – are not participating. Nationwide and Yorkshire Building Society, Britain's two largest, have declined to take part.


Patrick Wintour

The GuardianTramp

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