Unravelling Rumours: potential changes to first-time buyer incentives

Dear first-time buyers, this post delves into the numerical intricacies of first-time buyer incentives. It's also a bit longer than usual and features more data, but it's necessary to truly understand the nuances.

The press is abuzz with rumours of a review of the schemes which are currently available to you, a first-time buyer (FTB). And some of these speculations point towards potential announcements in the Autumn Budget Statement scheduled for 22 November.

Let's delve deeper into the most common rumours that are circulating and what they might mean for you, the first-time buyer:

Extension of the Mortgage Guarantee Scheme:

The Mortgage Guarantee Scheme, introduced in April 2021, was designed to encourage lenders to offer mortgages with just a 5% deposit, providing a lifeline to those struggling to amass a hefty deposit. This scheme is due to expire in December and so the rumour is that the government are thinking of extending this scheme for another 12 months.

It's important to note that this scheme primarily benefits mortgage lenders. It operates in a way that the end users (you, the first-time buyers) don't directly apply for it, and consequently, you may not even be aware if your mortgage even has this guarantee attached to it.

Governments love guarantee schemes, because they can promise significant support for numerous mortgage guarantees without disbursing a penny unless a guarantee is called upon. This gives the impression of significant public support but with minimal financial outlay.

Even with the mortgage guarantee scheme, lenders must still do a proper affordability assessment of FTBs when they apply for a mortgage, which could explain why take up has been so low. Government data reveals that, between April 2021 to November 2022, only 24k first-time buyers benefited from this scheme. Compared to the average annual number of FTBs, which is 350k, only a small handful of FTBs had the benefit of the scheme.

With rising interest rates, eligibility for a mortgage with a small 5% deposit has become even more challenging so it is likely that take up is now even lower than before. In spite of this, the scheme might still be a contender for an extension due to its low cost commitment for the government.

Change to the LISA Cap:

The Lifetime ISA (LISA), introduced in April 2017, allows individuals between 18 and 40 to save up to £4k annually, topped up by a generous 25% contribution from the government. Then, you can either withdraw your savings as the deposit for your new home (capped at £450k), or leave your money in the scheme for your retirement. Any money taken out at any other time or for any other reason is called an unauthorised withdrawal and gets charged a hefty 25% withdrawal fee (basically taking away the government's contributions).

Government records show that since inception, over 2m LISA accounts have been opened. Now, here's where the numbers come into play. Records show that 171k accounts have been used to buy a home, and 185k accounts have had unauthorised withdrawals (no withdrawals for retirement yet, that happens in 2037). So, based on rough calculations, the potential cost for their contribution by HM Treasury this year alone is around £1.958bn, payable 6 weeks after deposit, not when the savings are withdrawn.

With house prices in many areas surpassing the current £450k threshold, it's rumoured that this cap might see an upward revision. Since the original cap was set in 2017, the average house price in 49 local authorities in England now exceeds the cap. And another 27 local authorities (where the average house price is between £400k and £450k) are running close behind. That's nearly a quarter of all local authorities in England whose residents, in no time, will not be able to use their LISA savings for a home deposit. Even if house prices were to come down by, say 10%, there would still be 32 local authorities whose average house price exceeds the current cap.

An increase of the cap could be a possibility. No one has made a prediction of the new threshold yet. But, as an illustration of why this could be a benefit for the government, lets assume a new cap of, say £500k. Immediately, 21 Local Authorities will move back below the cap, potentially benefiting a large number of aspiring first-time buyers. It's a move that would not only aid you in your journey to home ownership but might also reduce the government's long-term financial commitment as more LISAs are used for home purchases instead of being held in the long term for retirement.

Possible New ISA Product for Potential Buyers:

While the former Help to Buy ISA faced constraints, there's speculation about a potential new ISA product tailored for potential buyers. However, for it to gain traction, it would need to outshine the benefits of the LISA. This potential addition might add a layer of complexity to the existing array of ISA options, making it a less likely move compared to potential adjustments to the current LISA rules.

In conclusion, the potential changes in first-time buyer incentives hold significant implications for aspiring homeowners like you. The ball might soon be in your court, and your input matters. What are your thoughts on these rumoured changes? How would they impact your journey towards home ownership?

Empowering you with knowledge, one saving scheme at a time. If you have any questions, insights, or if there's anything else you'd like to share, feel free to reach