Help to Buy Is Back. We Checked What Happened Last Time

Good morning,

Last weekend the government announced a new scheme that sounds almost too good to be true.

Buy your first home with a deposit of just 2.5%.

On a £230,000 flat, that's about £5,750 (Mortgage Introducer). For a lot of people that's a few months of saving, not five years.

But we've seen this film before. It was called Help to Buy, and two weeks ago the government published a 10-year review of how it went.

I read it so you don't have to.

Let’s dive in.

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• What is Your First Home?

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What is Your First Home?

Simple version: you put down 2.5%. The government lends you 20% as an "equity loan". You get a normal mortgage for the other 77.5%.

That equity loan is interest-free at first. You pay it back when you sell, and the amount you owe goes up or down with your home's value.

The catch: it's new builds only, from developers who've signed up. There will be income and price caps, with details at the Budget on 28 October (GOV.UK).

What happened last time

Help to Buy ran from 2013 to 2023 and worked almost exactly the same way, except you needed a 5% deposit.

According to the government's own evaluation, it helped with 387,000 purchases, 328,000 of them by first-time buyers.

Here's what didn't make the headlines.

Only 46% of buyers said they couldn't have bought without it. The rest could have bought anyway. Many just used it to get a bigger or nicer home (MHCLG evaluation).

When you give buyers more money to spend, some of it ends up in the price.

The number nobody's talking about

The same report found that new builds cost about 5.5% more than similar second-hand homes. That's called the new-build premium. You pay extra just for the home being shiny and new.

Now put two numbers side by side:

• Your deposit: 2.5%

• The new-build premium: 5.5%

See the problem?

Say you buy a new build for £200,000. The day you get the keys, a similar second-hand home nearby might be worth around £189,500. That £10,500 difference is the premium.

Your deposit was only £5,000. If you needed to sell soon, your share of the home could be worth nothing.

That's negative equity before you've even hung a picture.

Where it could work, and where it won't

In the North East, the maths looks decent. On an average-priced new build, a 2.5% deposit is about £4,400, and the mortgage would be roughly £814 a month. Average rent there is £788.

(My workings: average North East price from the UK House Price Index, plus the 5.5% premium, at a mortgage rate of about 5.2% from Zoopla via Mortgage Introducer. Rent from the ONS.)

So you'd pay about the same as renting, but you'd own the home.

In London, the same maths leaves you about £350 a month worse off than renting. And under the old scheme, interest on the equity loan started in year six (MHCLG evaluation). On a London new build, that would add roughly £170 a month.

Same scheme. Very different deal depending on your postcode.

So what do you do with this?

If you're thinking of using it:

1. Compare the new build with similar second-hand homes on the same street. If the gap is big, that's your premium.

2. Ask what the equity loan will cost once the interest-free period ends. Budget for it now.

3. Plan to stay at least five years. That gives the premium time to wash out.

If you're an investor, watch where the price caps land. More buyers will chase new builds in those areas, which is a warning sign if you're buying new-build flats to let.

If you remember one thing, make it this

A small deposit gets you through the door. It doesn't protect you once you're inside.

The scheme could genuinely help, especially outside London. Just make sure you're buying the home, not the premium.

I'll break down the final details after the Budget on 28 October.

Would you use this scheme? Hit reply and tell me. I'd genuinely like to know.