First-time buyers burned by Help to Buy

Despite month after month of falling prices, the housing market has so far avoided the most pessimistic forecasts for a market crash.

Mortgage repossessions are at historically low levels, lenders have stepped in with a raft of measures to ease the pain of higher rates and price falls have so far been gradual.

But the modest price declines mask churn beneath the surface. Homeowners coming to the end of fixed-rate deals are increasingly opting to sell long before they are forced to, seeing the writing on the wall from higher mortgage rates.

First-time buyers who purchased using the Help to Buy equity loan scheme are at the sharp end.

“Help to Buy encouraged people to buy property they couldn’t actually afford. A lot of these people are now looking to remortgage and they are totally failing affordability tests,” says Ranald Mitchell, of Charwin Private Clients.

“Since buying, they have added two cars, two kids, loans and credit cards to their lives, and on top of this the Help to Buy interest payments are kicking in.”

Under the scheme, which closed in March, buyers could purchase a new build home with a 5pc deposit and a 20pc Government-backed equity loan, or 40pc for those buying in London. This loan was interest-free for the first five years. After that, interest is charged at 1.75pc – a rate which then increases by a measure linked to inflation.

The interest rate is far lower than today’s mortgage rates. But the payments have a cumulative effect. They are hitting first-time homeowners just as their fixed-rate deals expire and their mortgage payments are soaring.

The surge in costs is starting to push first-time homeowners to downsize, a position most would never have predicted when taking their first step on the property ladder.

“We’re seeing people who can’t be helped and are really thinking actually, let’s just start again and buy something we can afford,” says Mitchell.

Darryl Dhoffer, of The Mortgage Expert Group, knows of one young couple with two children who are selling up and moving back in with family after seeing costs soar.

Story continues

The young family purchased a three-bedroom home in the South East for £300,000 with a 20pc Help to Buy equity loan and took out a mortgage five years ago at a rate of about 2pc.

However, their mortgage rate was set to jump to 5pc after their five-year fix expired two months ago. Monthly payments were going to increase from £712 to £1,085. On top of this, they had to start paying nearly £100 per month in interest on their equity loan.

“It just wasn’t possible for them,” says Dhoffer.

Nearly 94,000 homeowners who purchased using Help to Buy have not yet repaid their equity loans and will come to the end of their interest-free periods between April 2023 and 2025, according to Telegraph analysis of Homes England data.

Within this group, there are around 11,000 first-time buyers who purchased in London and will have to start paying interest on 40pc equity loans.

A typical first-time buyer who purchased a London home using Help to Buy with a five-year fix in 2017 will see their monthly payments soar by 71pc when they come to the end of their interest-free period – an extra £725 per month, according to analysis by Hamptons. This assumes they refinance at 5.8pc and accounts for the fact that they have paid off some of their loan.

Struggling homeowners are a very long way off from being repossessed. Lenders are offering an enormous package of support, which includes letting homeowners make a temporary switch to interest-only payments or extending their mortgage terms.

However, these are not long-term solutions if interest rates stay higher for longer – and the Bank of England has warned the base rate could stay above 5pc until 2026.

“You can’t hide from the higher interest rate shock forever,” says independent economist Ian Mulheirn.

“The forbearance measures will perhaps stop an immediate crisis, but one way or another households have to be able to afford their mortgages and to repay them.

“You might be able to kick the can down the road, but at some point banks and borrowers have to put things on a more sustainable long-term footing.”

It is not just Help to Buyers who are struggling. Other first-time buyers who bought during the peak of the pandemic boom are particularly at risk.

Samuel Mather-Holgate, of Mather Murray Financial brokers, says: “Over the last three months, we’ve spoken to a dozen clients who are now actively looking at selling their properties, just because they can’t afford the repayments.

“I have had several clients in tears. It is a really big portion of the market and if you were to class these sellers in the repossession figures, it would set alarm bells ringing.”

Mather-Holgate has dealt with a young family who bought their first home in Oxford three years ago. When their fixed rate deal expired, their mortgage rate jumped from 1.6pc to 6.5pc. This meant monthly payments rose by 120pc to £1,400.

“They’re looking at selling their home and moving out of the area to somewhere cheaper,” he says.

John Corben, of Corbens estate agents in Swanage, says second home owners are also selling up.

“People are putting their properties up for sale because they perceive that we are going into a rough time, and so they had better do it sooner rather than later,” he says.

Landlords are struggling too, says Mulheirn. Buy-to-let mortgages are excluded from the mortgage charter, under which struggling borrowers are entitled to support from banks, and the majority of landlords are on interest-only deals, which will see much bigger proportionate increases in costs.

This wave of downsizing is showing up in market data. Despite falling house prices, the number of new listings coming on to the market hit the highest level since March 2021 in June, according to property website Zoopla. The number of homes on the market hit the highest since November 2020 last month.

A Department for Levelling Up, Housing and Communities spokesperson said supporting aspiring homeowners is a government priority.

They said: “The Help to Buy equity loan is interest free for the first five years and, afterwards, a monthly interest fee of 1.75pc of the loan is payable, which is a significantly lower rate than current mortgage products.”

Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month, then enjoy 1 year for just $9 with our US-exclusive offer.