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How the Bank of Mum and Dad could fill the Help to Buy gap – Guy-White

by: Sophia Guy-White, co-founder of Generation Home
  • 14/02/2022
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How the Bank of Mum and Dad could fill the Help to Buy gap – Guy-White
Since launching in 2013, over 340,000 homebuyers have used the government’s Help to Buy scheme, representing £100bn in property value – 83 per cent of those using the scheme were first-time buyers.

 

The scheme has been popular, with a 43 per cent increase in the number of homes bought using it last year, its closure in March 2023 will cause trepidation for some.

Help to Buy intended to fix systemic issues facing first-time buyers: rising costs, limited housing supply, and the difficulty of saving for a deposit. Restricting the scheme to new builds intended to address the supply issue by incentivising production.

But despite contributing to over 1.4 million houses being built since 2013, it has inadvertently caused other issues, primarily inflating prices for new-build properties. The average price of a Help to Buy property has risen 60 per cent since the scheme’s 2013 launch, outpacing the overall market rise of 49 per cent.

A recent report found that whilst the scheme was productive outside major cities, demand hotspots like London saw new build prices inflated beyond the value of the subsidy.

Amidst rising house prices, the valuation of the government’s stake increases. This can be problematised by relatively high interest rates of 1.75 per cent following the end of the five-year grace period – rising by RPI + one per cent each subsequent year.

Combined with increasing inflation and the ‘cladding crisis’, homeowners can become ‘mortgage prisoners’ – making increasing repayments without making a dent in the government’s stake.

Increasing role of family lending but more flexibility needed

Despite these flaws, there is no denying that Help to Buy has succeeded in getting people into homes, and a key reason for its popularity was reducing the deposit burden on first-time buyers. With the government no longer providing equity loans, many will look elsewhere to plug the gap in their deposit. Increasingly, this means applying to the ‘Bank of Mum and Dad’, or BOMAD.

In 2021, BOMAD assisted nearly 50 per cent of first-time buyer purchases contributing £9.8bn, which is three times the government’s equity loans. In 2020 this was around £3bn.

In fact, the total value of equity loans under Help to Buy since its 2013 inception totals £20bn, while BOMAD has contributed £54bn over the last 10 years.

Most family lending is informal, taking the form of gifted deposits. Formalising it can encourage intergenerational wealth transfers. Our research has found that parents are willing to increase contributions by two to three times if they have certainty of repayment. A formal ‘deposit loan’ can help children in the short term, potentially allowing parents to benefit from their “investment” while having certainty of repayment.

Of course, not all families are lucky enough to have large cash lump sums. Some parents might be able to combine their salaries with that of their children, to boost their borrowing power.

With family already the UK’s ninth biggest lender, the industry must provide products, advice, and services that recognise its importance. No need to be restricted to new builds, or properties under £600,000. The key is flexibility and innovation, formalising age-old arrangements beyond a one-size-fits-all approach.

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