More Support for Home Buyers than Ever Before… But are First Time Buyers Being Left Behind?

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The government has extended the Stamp Duty holiday for home buyers in England and Northern Ireland. It has also announced that it will start backing 95% mortgages via a new Mortgage Guarantee Scheme to help more first time buyers and low-deposit buyers get on the housing ladder.

Over the course of the Covid-19 pandemic, the government has made consistent efforts to keep the housing market thriving. Its primary tactic has been to cut Stamp Duty to zero for thousands of home buyers.

However, despite the generous tax breaks, first time buyers (most of whom do not benefit from the Stamp Duty holiday) have suffered, with the number of first time buyers falling by an estimated 14.5% in 2020.

Now the government hopes its new Mortgage Guarantee Scheme, which started in April, will reinvigorate the first time buyer market.

What is the Stamp Duty holiday?

The Stamp Duty holiday was originally introduced in July 2020 to encourage people to start buying homes after the disruption caused by the coronavirus pandemic.

Home buyers in England and Northern Ireland could receive a tax break on residential purchases up to £500,000. This could translate to a tax saving of up to £15,000. Similar schemes were also introduced in Wales and Scotland.

As a result, the property market boomed. In the year to January 2021, the Land Registry UK House Price Index reported that house prices rose by around 7.5% with the average property price reaching around £250,000.

Stamp Duty holiday extension

The Stamp Duty holiday was set to end on 31 March 2021. However, because Stamp Duty is paid at the end of a conveyancing transaction, as the deadline approached, many were at risk of missing the deadline and facing a surprise tax bill. In February, the Guardian reported that 300,000 purchases could be saved by an extension.

Fortunately, the government listened to calls from experts and home buyers. On 3 March 2021 as part of the Spring Budget, Chancellor Rishi Sunak announced that the government would extend the Stamp Duty holiday deadline.

What are the new Stamp Duty holiday deadlines?

There are now two Stamp Duty deadlines to bear in mind if you want to buy a house in 2021:

  • 30 June 2021 – to take advantage of the tax break on purchases up to £500,000, you must complete by 30 June.
  • 30 September 2021 – if you do not complete by 30 June, you will still be able to receive a tax break on purchases up to £250,000 until 30 September.

For ‘main residence purchases’, this means many buyers will have no tax to pay. People purchasing second homes, buy-to-lets and main residence properties over the thresholds will benefit from reduced tax rates.

Buyers just coming to the market should be aware that transactions started now are unlikely to complete by the end of June, so should factor this into their budget and take independent financial advice.

Will the Stamp Duty holiday extension help first time buyers?

First time buyers have been an unfortunate casualty of the Covid-19 pandemic. It is no secret that the housing market is an unfriendly place for people who do not already own a home or have large amounts of savings to use for a deposit. However, the pandemic has only made things worse.

Before the original Stamp Duty holiday was introduced, first time buyers were already exempt from Stamp Duty on purchases worth up to £300,000 on properties worth up to £500,000. This first time buyers’ relief is just one of the ways the government is trying to help first time buyers get over some of the overwhelming hurdles to home ownership.

But it also means that, in many parts of the country, the Stamp Duty holiday only benefits the wealthiest first time buyers who probably would have been able to buy anyway. For example, in London, average house prices recently topped £500,000 and the average deposit is around £100,000. While a maximum £15,000 tax saving may benefit some first time buyers, is it enough to help more people get on the housing ladder in London? It seems unlikely.

The picture in other areas of the UK is also bleak. For example, in the South West of England, average house prices are nearly £275,000 and the average deposit is over £42,000. The average first time buyer in the South West would not benefit from the Stamp Duty holiday but are still expected to stump up a huge deposit.

Other issues caused and exacerbated by the pandemic, such as job insecurity, lack of house building, reduced availability of low-deposit mortgage products and rapidly rising house prices caused the number of first time buyers in 2020 to drop by an estimated 14.5%.

What help is there for first time buyers?

The government has always argued that it is committed to “turning generation rent into generation buy”, having helped “681,000 households to purchase a home since 2010 through government backed schemes including Help to Buy and Right to Buy”.[1]

The main way the government helped first time buyers during the Covid-19 pandemic was to extend the Help to Buy scheme several times over 2020. Originally, home buyers had until 31 March 2021 to complete their Help to Buy transactions, but this deadline has now been extended to 31 May. A new Help to Buy scheme also started on 1 April as scheduled.

On 3 March 2021, at the same time as the Stamp Duty holiday extension was announced, Rishi Sunak also announced a new Mortgage Guarantee Scheme to start from April.

How does the Mortgage Guarantee Scheme work?

The purpose of the Mortgage Guarantee Scheme is to encourage mortgage lenders to introduce more high loan-to-value products.

High loan-to-value mortgages all but disappeared during the coronavirus pandemic and first time buyers – the main consumer – suffered the most. Although many lenders have started to bring back 90% mortgage products, 95% mortgages (which were common before the pandemic) are still hard to come by.

This has priced many buyers out of the market. For example, for the average buyer in London, it means the difference between having to raise a £50,000 (10%) deposit and a £25,000 (5%) deposit.

Under the new Scheme, the government has agreed to back 95% mortgages, making them lower risk for mortgage lenders. This will allow buyers to buy any home worth up to £600,000 with a deposit of just 5%.

Many major lenders have signed up to the scheme, including Lloyds, NatWest, Santander, Barclays and HSBC.

Buyers are still be required to pass all other mortgage lender affordability checks and stress tests and should always seek advice from an independent mortgage broker or financial advisor to make sure they are getting the best deal.

The scheme is currently scheduled to run until December 2022.

Is the future bright for first time buyers?

It remains to be seen whether the Mortgage Guarantee Scheme will have a positive impact. The initial reception of industry players and experts to the Mortgage Guarantee Scheme has been mixed. Many claim that it will reopen doors to home ownership for first time buyers. Others claim that it will not address the issues at the core of the ‘generation rent’ housing crisis, such as:

  • Lack of available housing stock and new homes being built.
  • The argument that schemes such as Help to Buy and the Mortgage Guarantee Scheme create artificial housing bubbles, pushing prices up even further.
  • House prices are rising much faster than wages and other economic and social mobility issues.

Despite all the doom and gloom, we can take an optimistic outlook. Until 2020, the number of first time buyers had been rising steadily, year-on-year, and over 300,000 managed to take their first step onto the property ladder last year. So, we anticipate that once some of the stressors of the Covid-19 pandemic have been removed – such as increased unemployment – the number of first time buyers may start to recover.

Are you planning on buying or selling your home in 2021?

It is a great time to buy or sell your home.

Buyers have the opportunity to take advantage of the range of government schemes and initiatives, such as the Stamp Duty holiday, the Mortgage Guarantee Scheme or Help to Buy.

Sellers can enjoy a busy market with loads of interest, giving you the opportunity to secure the best possible deal for your home.

Choosing the right conveyancing solicitor is essential to help your transaction go as smoothly as possible. We work fast and proactively, keeping our clients updated at every stage of the process.

For expert advice, please contact our friendly and highly experienced conveyancing solicitors in Wells, Street or Somerton.