The Help to Buy equity scheme could leave buyers in negative equity and has left the government exposed to "significant market risk", according to the National Audit Office.
In a progress review of the scheme, published yesterday (June 13), the watchdog concluded it was too early to tell if the scheme had been value for money or whether the "very substantial portfolio of loans" would result in a net return or a cost to the taxpayer.
Through the government’s Help to Buy equity loan, buyers can borrow 20 per cent of the cost of a new build property — 40 per cent in London — from the government with no loan fees for the first five years of owning the home.
This means buyers only need a 5 per cent cash deposit and a 75 per cent (55 per cent in the capital) mortgage to make up the rest.
The initiative has helped thousands of borrowers take their first steps onto the property ladder with more than 200,000 properties being bought via the scheme since it launched on April 1, 2013, according to data from the government.
However the NAO’s review pointed out that the scheme exposed the government to market risks over which it had limited influence and put buyers at risk of entering negative equity.
The government's housing agency Homes England’s annual accounts stated that "a downturn in house prices or other economic conditions could place the balance sheet under considerable pressure" while the review noted the return on investment was sensitive to house price changes.
According to the parliamentary watchdog, the government had put reasonable arrangements in place to benefit from increasing property prices through the scheme but stressed the taxpayer could lose out significantly if the government’s investment in housing capital was to reduce in value.
Latest data from lender Nationwide showed annual house price growth across the UK remained below 1 per cent for the sixth consecutive month in May, while the cost of a property was declining in London.
On top of this, Homes England, which provides the government loan on the property, is exposed to greater risk. If a property is repossessed, the mortgage lender gets the first cut of the sale proceeds, then comes Homes England.
The review also found that some buyers risked falling into negative equity — when the property value falls below the amount owed on a property loan — due to the so-called new-build premium.
New-build properties typically cost about 15-20 per cent more than the equivalent lived-in home so buyers who want to sell their property soon after purchase could be in negative equity as this premium drops away.
As for those benefiting from the Help to Buy scheme, the review found that three fifths of users could have bought a property without the support of the scheme — although only one in three could have bought the property they wanted — and that 19 per cent were not first-time buyers.