New report calls for government-backed ‘loan-to-own’ scheme for first-time buyers

The scheme works by providing a loan covering up to 20% of the value of the property. The government provides the loan and it is interest-free for the FTB for the first five years.

However, developers pay a 5% coupon annually for the first five years to cover the cost.

After five years, FTBs are expected to refinance and likely either fully or partially absorb the 20% equity loan into their existing mortgage (including any increase in the value of the 20% equity that has occurred).

If any outstanding amount of the equity loan is not absorbed, the FTB will pay interest on this starting at 3% in year six, before being uprated by Retail Price Index for each subsequent year.

The report’s authors believe the policy proposal “should therefore be fiscally neutral or even generate revenue for the government”.

As an example, the report sets out how a FTB with a £70,000 household income purchasing a £350,000 property would be unable to buy the house with a standard 95% mortgage, as they exceed the income multiple of 4.5 often specified by banks. Loan-to-own would, however, make this purchase feasible.

The modelling indicates that the same FTB will be £500 per month better off every month in the first five years compared to if they had a 95% mortgage.

At the same time, there would be an estimated minimum of 70,000 FTB transactions if the policy were introduced today.

The government would gain almost £30m in additional revenue annually from the developers’ coupon payments. It would also gain from any increase in house prices and receive revenue after the first five years from FTBs paying interest.

According to a recent analysis by Halifax, the number of FTBs stepping onto the property ladder rose to 341,068 last year, up 19% compared to 2023.

FTBs made up over half (54%) of all home purchases made with a mortgage last year, the biggest majority on record. But the average deposit was £61,090, and the average FTB typically paid £311,034 for their first home.

Weston Homes’ own research shows 79% of FTBs relied on the ‘bank of mum and dad’ in the last 12 months.

Mr Weston added: “Every week, many potential FTBs are visiting our sales offices. There is a strong demand for homeownership rather than paying [for] exorbitant private rental or staying at home with their parents into their 30s.

“But consistently, the primary reason why most cannot afford to buy is due to having insufficient savings for a deposit.

“In order to get the country’s developers housebuilding again, Weston Homes believes the key missing link is that we need to take action to help FTBs secure access to housing credit and deposits.

“That’s why we’re calling for the creation of a new form of home purchase assistance initiative.”

The latest report comes after Inside Housing Living reported recently how house builders are increasingly targeting big families and affluent households as FTBs are priced out.

Jethro Elsden, chief economist at TYI, added: “Our analysis shows that supporting FTBs in accessing housing finance in a targeted, fiscally responsible way can have a meaningful impact and not only help more FTBs get on the housing ladder but also work hand in hand with supply-side reforms to boost the delivery of new homes.

“This scheme demonstrates that it is possible to unlock access to homeownership, support market liquidity and accelerate build-out rates while remaining cost-neutral, or better, for the taxpayer.”