As help to buy winds down, caps on savings schemes will only hinder home ownership
Help to Buy, an equity loan scheme, helped hundreds of thousands of first time buyers get on the housing ladder, as it ends, it makes lifting the cap on Lifetime ISAs all the more important, writes Annabelle Williams
Netflix, avocado, bottomless brunch and Deliveroo – we’ve all heard the cliches blaming Generation Rent’s struggles on their spending habits. And as help to buy, the equity loan scheme for first-time buyers, comes to an end, I’m sure we’ll hear plenty more.
Anyone who still thinks the biggest barrier to home ownership is smashed avocado on toast may be interested to hear that the price of a humble avocado has fallen 20 per cent in the past five years. That’s amid a smorgasbord of price rises affecting every palette, from cheddar cheese costing 17 per cent more than a year ago and tomatoes now 22 per cent more expensive.
So, is this good news for Generation Rent? Will the decline in avocado prices from an average of £1.10 each in 2017 to 88p today hasten the jump onto the property ladder? Probably not; rampant house price inflation has added £20,000 onto the price of the average home in the last year. That’s the equivalent of 22,988 avocados, or how much a person would spend on Netflix if they had a monthly subscription for 238 years.
These quibbles over renters’ spending habits have diverted attention away from a very different potential barrier to home ownership. It’s a flaw in the government’s flagship scheme for building a deposit and escaping the rental trap, called the Lifetime ISA – and thankfully it’s easily fixable.
The Lifetime ISA offers a 25 per cent cash bonus on money stashed away for a deposit on a first home or retirement. Accounts can be opened by those aged 18-39 who can pay in up to £4,000 per year. The money can be held in cash or invested, and there’s no tax to pay on interest or investment returns.
It’s been wildly popular with Generation Rent, some 545,000 of whom have an account, as it can lower one of the main barriers to home ownership – difficulty raising a deposit. Estimates suggest first-time buyers are putting down an average of £60,000 to secure a mortgage, an amount that many will find harder to save if inflation rises further.
The Lifetime ISA could be a lifeline. But first-time buyers can only use it to purchase properties costing £450,000 or less. In London, homes have reached a record average price of £537,920, and there’s only one borough where the typical home comes in under the Lifetime ISA’s limit. It’s Barking and Dagenham, where prices average £342,083.
The price cap was likely designed to prevent the wealthiest first-time buyers receiving a leg-up to purchase the most expensive homes, but it’s remained the same since 2017 when the Lifetime ISA was launched. In that time the typical home in England has risen 25 per cent in value, and if the price cap had been raised in line it would now be £562,500.
Hopeful home-buyers might be squirrelling away their income in Lifetime ISAs while actually being unaware that it may restrict where – or even whether – they can buy a home.
This isn’t just a London problem as the average home in Guildford, Cambridge, Chichester, Oxford and Winchester is priced above the LISA’s limit while Bath, Brighton and Hove are also nearing the price cap. There’s inconsistency too, with the government’s Help to Buy Equity Loan Scheme which lends first-time buyers capital to buy a home and has regional price caps that reflect the local market, ranging from £186,000 in the north-east to £600,000 in London.
It’s time to raise the £450,000 price cap on homes that can be purchased with the Lifetime ISA. Let’s be clear about what’s preventing renters from making the jump into home ownership – it’s property prices and as a nation we can help address that.