Your First Home: Solving first time affordability?

The Government’s proposed 2.5 per cent deposit scheme could bring home ownership closer for first-time buyers struggling to accumulate substantial savings. But a revival of the equity-loan model also resurrects an old question: does helping buyers ultimately make homes more affordable?

For aspiring homeowners, there is a particular frustration in earning enough to contemplate a mortgage while never quite accumulating the deposit needed to secure one.

The Government’s proposed Your First Home scheme is designed to tackle precisely that problem. Due to be confirmed at the Budget on 28 October, it would allow eligible first-time buyers in England to purchase participating new-build homes with a deposit of just 2.5 per cent, supplemented by a 20 per cent government equity loan with an initial interest-free period.

It is an eye-catching proposition, particularly for renters struggling to save while meeting housing costs. But the implications are more complicated than the headline suggests.

The Government says the policy is intended to tackle the deposit barrier for first-time buyers who would otherwise be unable to afford their first home.

Halving the deposit

A hypothetical £425,000 purchase illustrates the mechanics. A 2.5 per cent deposit would be £10,625. A 20 per cent government equity loan would contribute £85,000, leaving a mortgage of approximately £329,375.

By comparison, a conventional 95 per cent mortgage would require a £21,250 deposit and borrowing of £403,750.

The £425,000 figure is illustrative rather than a proposed scheme limit. Local property-price caps and household income limits are planned, but their levels have yet to be announced.

That distinction will be particularly important in London, where reducing the deposit hurdle does not necessarily solve the underlying problem of high purchase prices. Buyers will still have to demonstrate that they can afford the mortgage and meet lenders’ criteria.

Help to Buy revisited

The architecture inevitably recalls Help to Buy. Introduced in 2013, that scheme also used government equity loans to assist purchasers of new-build properties. Official figures show that 387,195 homes were purchased using Help to Buy equity loans by the time the scheme closed in 2023, including 328,346 purchases by first-time buyers.

Its legacy, however, offers lessons for its successor.

A Government-commissioned evaluation published this month concluded that Help to Buy supported home ownership and housing supply, but identified considerable regional variation. Among almost 6,000 customers surveyed, 54 per cent said they could have bought without the scheme, suggesting that some government support went to households that did not require it.

There was also evidence that the scheme affected prices in already expensive markets.

That presents ministers with a familiar dilemma: assistance can increase buyers’ purchasing power, but unless housing supply responds sufficiently, some of that additional capacity risks being reflected in prices.

The equity question

Another crucial detail concerns the Government’s 20 per cent stake.

This is an equity loan, not a grant or discount. The precise repayment mechanism, length of the interest-free period and any subsequent charges under Your First Home have yet to be detailed.

Under Help to Buy, the amount ultimately repayable reflected movements in the property’s value. It should not be assumed that Your First Home will adopt identical terms. This is one of the important details to watch when the Budget provides the scheme’s financial framework.

Your First Home will also sit alongside existing assistance. The permanent Mortgage Guarantee Scheme already supports mortgages requiring deposits as small as 5 per cent, while First Homes provides qualifying purchasers with discounted properties. The Treasury has also consulted on replacing the Lifetime ISA with a new First Time Buyer ISA.

For buyers shut out principally by the difficulty of accumulating a deposit, Your First Home could make a meaningful difference. For those prevented from buying by high prices relative to earnings, the equation is less straightforward.

The real test on 28 October will therefore be not simply how little buyers need to save, but whether the scheme can improve access to home ownership without inadvertently adding further pressure to the prices they are trying to afford.

This article is for informational purposes. Always seek professional advice before making any property or financial decisions. The views expressed in this article are opinion-based commentary intended to explore potential market outcomes. Housing market performance is influenced by a wide range of factors including interest rates, mortgage availability, economic growth, employment levels, taxation, housing supply, and consumer confidence. Actual market developments may differ from the scenarios discussed. Always seek professional advice before making any property or financial decisions.