Building your Tembo Plan
What the 2021 budget means for aspiring home buyers.
Yesterday the Chancellor turned the key in his big red briefcase and announced his latest budget. As Boris Johnson looks to turn "generation rent into generation buy", a number of announcements were made that will affect would-be first time buyers, including the latest iteration of the Help to Buy scheme and the stamp duty extension. Here's everything you need to know.
Stamp duty extension confirmed
Last summer, the government turbocharged a lockdown-hit property market by temporarily increasing the amount at which stamp duty is paid to £500,000.
However, the subsequent boom in property sales triggered by the stamp duty holiday (perhaps unsurprisingly) led to a huge backlog for conveyancers and lenders, which in turn increased the average timeline from offer to completion from a modest 13-weeks to over 17-weeks. This left hundreds of thousands of buyers in the lurch, unsure whether they would be hit with a surprise stamp duty bill of up to £15,000.
Leaked rumours of an agreed stamp duty extension have been circulating for weeks, giving hope to those in the process of buying, but who wouldn’t meet the original date of 31st March.
Well, this morning 300,000 home-buyers will wake up on the right side of the bed, because Sunak has announced that the stamp duty will be extended. And not just by a few weeks either. Buyers won’t pay a penny of stamp duty until 30th June on properties up to £500,000, and as late as the end of September for properties up to £250,000. From October onwards, the exempt band will snap back the usual £125,000 threshold.
Help to Buy 2.0 to arrive in April
It’s fair to say there weren’t many surprises in this Spring budget. By the time Wednesday’s announcement rolled around, Sunak had already released a slick promotional video (we’ll leave you to judge this not-so-slick video from earlier in the week) and revealed the vast majority of the budget’s detail. Notably for first time buyers, the announcement that the government would be remodelling their controversial Help to Buy scheme was made four days before Sunak faced MPs.
First, a bit of context.
After low-deposit mortgages were all but wiped out in the wake of coronavirus, the latest Help to Buy scheme is focused on bringing 95% mortgages back onto the market. The government are doing this by offsetting the risk for lenders with a guarantee that compensates the lender for a portion of their losses in the event of missed payments and repossessions.
Here are the headlines:
- Unlike previous Help to Buy schemes, this is not linked exclusively to first-time buyers, nor is it only eligible for new build properties.
- The scheme will be available on home purchases up to a value of £600,000.
- It will be available from April this year, until December 31st 2022, revealing it to be a COVID response, rather than a lasting policy shift for the government.
There are notable benefits here for would-be buyers who are struggling to save enough money for a 10-15% deposit. However, there are a few key issues for buyers that the scheme fails to address.
- Affordability: As house prices have continued to race past wage growth, the UK has an affordability gap to grapple with. In 2020, the average salary in the UK was £30,800, and the average house price was £256,000. With buyers only able to borrow up to 4.5x their wage from a lender, these figures leave a gaping 45% hole which is expected to be filled by a deposit. So, for the ‘average’ Brit, a 5% deposit won’t even get close to cutting the mustard in terms of affordability.
- Competitive interest rates: We are yet to see exactly what interest rates lenders will launch with in April, but with a typical 95% mortgage offering a 3-3.5% interest rate, and the lender needing to pay the government a premium for the guarantee, we could be talking 4%+. At this level of interest, it becomes very difficult to pay any capital off, meaning the length of the mortgage grows exponentially.
- Accessibility: Lenders will only process a limited number of applications per month, meaning that access to the scheme could quickly become competitive as buyers jostle in a crowded market.
On top of all of this, there are concerns that this latest scheme will only serve to inflate the property market (as the previous Help to Buy scheme did). And that the combination of negative equity and precarious lending will ultimately lead to defaults for those who struggle to afford monthly repayments or are unable to sell their home.
How all of this affects the devolved nations
Despite pressure on the devolved nations, currently neither Scotland nor Wales have announced any update policies. So, for now at least, yesterday’s announcements on stamp duty and the Help to Buy scheme are only relevant for buyers in England and Northern Ireland.
Net impact for first time buyers
The stamp duty holiday extension is brilliant news for first-time buyers. With the average price of a first home sitting at around £196,000, the relief will remain in play for the majority until the end of September, leaving plenty of time to make good on the government’s policy.
As for the mortgage guarantee policy, buyers should reserve judgement until interest rates are revealed in April.
If you’re desperate to get onto the ladder, but a deposit is stopping you, try Tembo. With our family deposit booster, a home-owning family member or friend can help you get on the ladder without needing a lump sum of cash. Complete a plan today to see if you’re eligible.
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