Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
Home ownership in Britain fell during the last decade for the first time in nearly 100 years. This is despite the fact most people still aspire to own their own home. It is an understandable aspiration: a well-supplied home rental market is important for choice and mobility, but home ownership brings the guarantee that you won’t be uprooted because the landlord gives notice, a valuable source of confidence and stability for many families. It’s one of the reasons why Conservatives from Harold Macmillan through Margaret Thatcher to David Cameron have tried to do what they can to help people fulfil this aspiration.
Simplifying the planning laws to remove national targets and giving councils the responsibility to plan for the homes their local community needs is improving the supply of homes. The number of new homes given planning permission has risen by 22 per cent since the National Planning Policy Framework was published last year.
But even so, thousands of people who could afford a mortgage don’t get the chance to own their own home because deposits required by lenders have increased since the financial crisis. In some parts of the country it can take a couple on average earnings ten years of saving to be able to afford a deposit for a house or flat, and for single people longer.
Help to Buy, the Government scheme to assist homebuyers with deposits is designed to address this recent obstacle to home ownership. If a homebuyer can provide a 5% equity deposit the Government will act as a guarantor on the next 15% of the property value.
Some people have worried that providing a route to providing a property with only 5% equity is too small a buffer to withstand any future turbulence in the housing market, in the light of the experience of negative equity in the early 1990s, and the rash lending policies of banks before the crisis.
But there is a vital difference between Help to Buy and the riskier mortgages of the recent past. Every Help to Buy mortgage is required to be taken out on a repayment basis, rather than interest-only. At the height of the boom, many banks advanced interest-only mortgages without any record of a repayment vehicle being in place. This makes a huge difference. For a property at the average UK price of £242,000 a Help to Buy mortgage taken out with a 5% deposit will, through repayments, have built up to a 11% equity share – even if house prices are totally flat – after three years, and a 16% equity share after five years. In subsequent years, the increase in equity accelerates as, typically, more capital is repaid in the later years of a repayment mortgage.
This critical requirement for repayment means that Help to Buy embodies, in effect, a savings scheme that builds to a substantial equity stake – and a buffer against future turbulence that is rapidly established.
In fact, Help to Buy, by reducing the deposit required to 5% and requiring a prudent repayment, is very similar to a scheme operated by Harold Macmillan’s Conservative Government, as this extract from the 1961 Which? Guide to Home Ownership shows: