Since its launch almost eight years ago, the Help to Buy equity loan scheme has played a pivotal role.

It was designed to do two things – to ensure a consistent flow of new construction by providing builders with a supply of first-time buyers and second-steppers, and to help buyers get on and up the housing ladder.

And, having helped over 291,903 buyers purchase a new-build home since 2013, it has proved to be a popular initiative amongst buyers, lenders and housebuilders alike.

Government funding is not open-ended, however, and the scheme is set to be closed down completely at the end of March 2023.

From 1 April this year, however, it will be limited to first-time buyers only. This is a significant change: around 18% of buyers – the equivalent of 51,820 borrowers – were existing or previous homeowners and were able to use the scheme to help make their next move.

This not only benefitted them, but also released smaller homes back into the market, making them available to first-time buyers.

The new scheme has additional features which may further restrict its suitability for some groups of prospective purchasers: regional house price caps will apply, which may impact those looking for larger homes in more expensive areas.

With the average first-time buyer age in the UK now around 34, many may require more space for growing families.

The impact of the pandemic

The scaling down of Help to Buy and its eventual withdrawal have been well signalled – but the timing is not ideal given the upheaval caused by the coronavirus crisis.

The most obvious impact was the temporary slow-down in construction in Q2 2020 – which has since picked up, but the hiccup created a surge in demand as non-first-time buyers started racing to meet the 31 March deadline.

In doing so, they have been competing with other buyers seeking to take advantage of the temporary stamp duty exemption – which also ends on 31 March – thereby putting further pressure on lenders and conveyancers seeking to complete the necessary legal work.

Elsewhere, the immediate response to the pandemic led lenders to focus on servicing their existing customers.

Many reduced or withdrew their higher loan-to-value products, leaving low-deposit buyers with fewer options.

Availability of high loan-to-value mortgages is now returning, but slowly: just 248 90% LTV products were available in February 2021 compared to over 700 before the pandemic.

The low-deposit challenge

The challenge of raising a deposit was well-documented long before we found ourselves in the strange new world of lockdowns and home working.

Although affordability has rarely been better for borrowers, with interest rates and inflation at historic lows, ironically, many lenders found themselves needing to raise interest rates in order to try to stem the flood of applications for loans.

As things calm down gradually, the deposit gap will still be there, especially for first-time buyers who may have the required income to justify a high loan-to-value product, but are unable to save because they are paying high amounts of rent.

So the question is now – what, if anything, should replace Help to Buy?

Lender solution

One option is for lenders simply to return to the 95% LTV space – as this gives them the most flexibility and control over the product.

Properly underwritten, 95% lending should not be inherently any more risky than lower LTV, but it does require expert assessment, which is more time-consuming.

It is also likely to become more complex: some consumers will have lost or changed jobs, and many small businesses will have been severely challenged during the pandemic.

That’s before we even start counting the cost and implications of Brexit. Other borrowers will still struggle to meet the affordability criteria and stress tests imposed by the regulators.

IMLA has repeatedly argued that these are disproportionately severe and are preventing many potential buyers from being able to obtain mortgages which they would be perfectly able to repay.

Market solution

The market has of course long been aware that Help to Buy would not continue indefinitely and that the government has been expecting it to find its own alternatives.

As a result, there are now several promising and innovative solutions aimed at doing just that.

One model works by providing additional funding and taking the first “hit” in the event of a borrower defaulting, thus mitigating the lender’s risk.

The lender does not need to set aside additional capital for the part of the loans that exceeds 80% LTV.

It can therefore charge a blended rate which takes account of the fact that the loan costs the lender less to fund – while also reflecting the return expected by the funder.

While it is clearly not IMLA’s role to champion or favour any particular market solution, we are aware that such schemes will depend on gaining sufficient traction and volume in order to be viable.

We have therefore helped to facilitate discussions between providers and lenders, to give members the opportunity to become more aware of the options available and challenge how they work.

Government solution

It is also – just – possible that the government might decide that progress on market-led solutions has not been fast enough to support the amount of new-building that it has promised to deliver – and might re-introduce some form of Help to Buy scheme.

On the plus side – there would be one single scheme and one set of rules/administration to deal with. The disadvantage is that Government-led schemes can tend to be heavy on the bureaucracy and funding is unlikely to be committed long-term.

If the government is minded to take further action, it will need to start signalling this very soon because even a hint of such an intervention could significantly impact the progress of other initiatives.  As is so often the case, joined-up thinking and clear communication are essential.

A long-term need

It’s unlikely that we will see a cooling off in demand for higher LTV products, with the numbers of low-deposit buyers wanting to move onto and up the ladder seemingly greater than ever.

Wherever the answer lies, Help to Buy needs to be effectively replaced if borrowers are not to be poorly served in future.

Kate Davies is executive director of the Intermediary Mortgage Lenders Association (IMLA)