The Help to Buy scheme aided people with higher-than-average incomes the most, as lending constraints around income are a significant barrier to homeownership, research has found.
The Institute of Fiscal Studies’ (IFS’) report, Who benefits from ‘Help to Buy’ schemes?, found that measures to relax loan to value (LTV) constraints but not loan-to-income (LTI) limits did little to help those on lower incomes in high house price areas.
Instead, schemes like Help to Buy tended to support “inframarginal” buyers who may have been able to buy a home using their savings or family support.
It found that most non-homeowners were limited by the LTI rather than the LTV constraint on borrowing, evident in its finding that those using the Help to Buy scheme tended to have higher incomes. The 20% loan provided by the government allowed people to take out mortgages at lower LTV tiers, therefore meeting the LTI restriction.
It said Help to Buy allowed people to buy a home sooner, as they would have eventually been able to raise a deposit, but did not impact whether they would eventually become homeowners or not.
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Income constraints are a bigger barrier
Schemes aiming to address housing affordability depend on the effect on the supply of homes for sale, IFS said, and where supply is constrained, prices are more likely to increase.
Further, targeting specific groups could make homeownership affordable for some, but at the expense of others competing for the same properties.
Its research suggested that when Help to Buy relaxed borrowing limits, higher earners saw a larger increase in the proportion of local properties they could afford and a bigger rise in the maximum affordable price.
When introduced in 2013, the Help to Buy scheme allowed the purchase of new-build homes worth up to £600,000.
IFS said those living in London and the South East saw steeper increases in the maximum affordable property price, but a lower rise in the number of homes they could afford, compared to people in the North of England.
The study also looked at the impact of the Help to Buy mortgage guarantee scheme, which saw the government cover a portion of a lender’s loan against defaults, with that portion being between 80 and 95%.
This was open to first-time buyers and existing homeowners.
This scheme was mostly used in areas with lower pre-Help to Buy prices, such as the North.
The impact of the mortgage guarantee scheme on maximum affordable house prices was “very limited”, while Help to Buy “shifted the distribution of maximum affordable prices upwards”, it found.
The IFS said the Help to Buy equity loan scheme relaxed both LTV and LTI restrictions on new-build homes and had a larger effect on maximum affordable prices.
Meanwhile, the mortgage guarantee scheme only relaxed the LTV constraint and had minimal impact on affordability, because the LTI limit was more restrictive.
The IFS said its findings suggested income constraints could be more important to housing affordability than had been assumed, and equity loan schemes would have a more meaningful impact.
It added that schemes that offered more generous subsidies to people with lower incomes could extend the benefits of Help to Buy but would require a “difficult trade-off”.
“It could reduce inequalities when getting on the housing ladder, but would also increase the exposure of both the government and potential new borrowers to housing market downturns.
“This trade-off would clearly need to be navigated with considerable care”, the IFS said.