4 March 2024

Let’s make this Budget work for first time buyers

By Natalie Elphicke MP

Britain is in the midst of a housing crisis. Housebuilding is down and first time buyers are struggling to get onto the housing ladder. Meanwhile, rents have rocketed and homelessness has shot up. Things can’t carry on like this. There needs to be a complete overhaul – starting with help for first time buyers in the upcoming Budget.

Although the housing crisis impacts everyone, those under 40 are hit particularly hard. They have a double whammy stopping them getting onto the housing ladder. They can’t save for a mortgage deposit because rents have soared, while house prices have gone through the roof.

That’s why the Chancellor is right to be considering help for first time buyers in the upcoming Budget. Home ownership is the most effective vehicle for savings and wealth creation. Home owners have a stake in society and are able to build up a stock of wealth. It is the first rung on the ladder of opportunity and central to fostering the aspiration we need to boost our economy. It also provides the surest nest egg for a comfortable retirement.

The idea the Chancellor is said to be mulling is that first time buyers would be able to get a mortgage with just a 1% home deposit. The Government would then provide a guarantee. The problem is that such a scheme would be risky for first time buyers on the one hand and risk driving up house prices on the other. This is the right priority, but there are better and safer ways to help first time buyers.

The 1% deposit idea is risky because it is basically the same as a 100% mortgage. The Government guarantee only helps the bank, not the consumer. If the mortgage holder loses their job or runs into money trouble, they remain liable. If house prices go down, they won’t have a buffer. Just last year house prices fell by more than double the proposed minimum deposit level – over 2% in the 12 months to November 2023, according to ONS data. The regions of the East, South-East and London saw much greater year on year house price falls, with London down by 5% in 2023. This is why the consumer group Which is right to describe such mortgages as ‘risky and rare’ for consumers. Having a mortgage deposit buffer of at least 5% is self-evidently prudent.

The design of any scheme must be safe for first time buyers, affordable for the Government and avoid driving up house prices.

So what should the Chancellor do?  First he should consider allowing young people to use their own money to fund a mortgage deposit. Following the introduction of pension auto-enrolment, many young people in work are already saving enough for a mortgage deposit, they just can’t get access to it. It’s locked away in their workplace pension until they retire. Allowing first time buyers to transfer workplace pension contributions to fund a mortgage deposit would help more first time buyers onto the housing ladder – and boost personal wealth too.

The average price of a first time buyers’ home now stands at around £225,000 – requiring a deposit of between 5% and 10%. That means under a new pension transfer scheme, with pension workplace contributions at the current minimum 8% of salary, a first time buyer on average income could have a mortgage deposit within five years.

Pension transfer schemes are not the only way to raise a deposit. A new Government backed housing deposit loan scheme could provide the money upfront and be repayable through the tax system – just like student loans. Such a scheme could even be government guaranteed but privately funded to spare the currently strained public finances.

Schemes like these would mean workers on an average salary could fund a decent mortgage deposit by their late 20s. This would – much more safely – radically improve the opportunities for tens of thousands of people, in a more financially sustainable way for would-be homeowners and the public purse too.

Any new deposit scheme must avoid driving up house prices and get Britain building again. That’s why there needs to be support for a big increase in housebuilding to provide the homes we need for first time buyers. For this reason, there is a powerful case for any first time buyer support to be linked to new homes.

Getting young people out of rented flats and into a home of their own would be transformative for a generation. That’s why this Budget needs to be one for first time buyers with an energy and sense of purpose that will help first time buyers onto the housing ladder and get Britain building again.

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Natalie Elphicke MP is Head of Housing Delivery at the Housing & Finance Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.