New Starter Deposit scheme could deliver a double win by helping up to a million priority first-time buyers onto the housing ladder

A new targeted equity loan scheme could help up to a million priority first-time buyers – for whom getting on the property ladder would reduce their housing costs and raise their living standards in one fell swoop – according to new Resolution Foundation research published today (Thursday).

Credit where credit’s due? examines who has lost out from falling home ownership in recent decades, why they can’t get onto the housing ladder, and how policy could help them.

The research finds that low-and-middle-income families (between 20^th and 60^th income percentiles) have seen by far a larger fall in home ownership since 2008, down 17.4 per cent, compared to a fall of just 4 per cent among better-off families.

In order to understand why, the research examines the characteristics of around eight million ‘potential’ first-time buyers – individuals or families aged 21-55 who are in work but not homeowners. It then tests how many would pass the hurdles buyers must get over to secure a mortgage: a 95 per cent loan to value ceiling; a 4.5 loan to income cap; and a view of lenders’ affordability tests.

The research finds that half of these potential first-time buyers would pass the assumed income requirements for a ‘starter home’, but just 15 per cent pass the deposit requirement. In fact, the typical potential buyer would have to save for 5 years to secure a five per cent deposit and 1.7 million would need to save for over a decade.

Around one-in-three first-time buyers rely on the Bank of Mum and Dad to get them over this deposit barrier. However, this ‘bank’ isn’t open to everyone and risks leaving those without wealthy parents behind – fuelling inequality within generations.

Given this, there are those who would say a blanket loosening in mortgage-market regulation is the answer.

Recent regulatory changes have helped some first-time buyers. However, the authors caution that any further loosening must reflect the repayment pressures prospective homeowners face. After all, first-time buyer repayment burdens are currently as high as they were in the early 1990s and mid-2000s, while today’s geopolitical uncertainties mean that interest rates are as likely to rise as fall.

Policy efforts should therefore focus on delivering a double win for around one million priority first-time buyers who could reduce their housing costs and raise their living standards by buying a home. The Foundation proposes a government-funded ‘Starter Deposit’ equity loan scheme, in which the state would provide a loan that could be topped by up to £3,000 of someone’s own money.

The report finds that a typical priority first-time buyer family accessing this scheme would spend £2,600 less a year on mortgage payments than they currently spend on rent, while also accumulating £1,700 in property wealth in the first year.

To target the scheme effectively, the loan size would be capped at five per cent of the lower-quartile price of a terraced home in each region. This would allow first-time buyers using the scheme to buy homes worth up to £175,000 in the North West, and £325,000 in London and the South East.

This targeting would help priority first-time buyers get on the housing ladder, particularly those without access to the Bank of Mum and Dad, while avoiding the risk of the gains being eroded away with price rises. It would also avoid the problem of poor targeting under Help to Buy where people who were already able to buy homes simply bought bigger properties.

Simon Pittaway, Senior Economist at the Resolution Foundation, said:

“The dream of owning a home is a distant one for many people today, with home ownership rates falling particularly fast for low-and-middle-income families.

“The main barrier to home ownership is finding a deposit in today’s world of sky-high house prices. Building more homes in the right places is needed to relieve this underlying price pressure, but that will take time.

“In the meantime, many rely on the Bank of Mum and Dad for support. But this leaves behind those who don’t have wealthy parents to help them and fuels inequality within generations.

“We identify around one million ‘priority’ first-time buyers who would enjoy lower housing costs and higher living standards if they were able to get onto the housing ladder. For these families a new, targeted ‘Starter Deposit’ equity loan scheme would deliver this double win by providing the five per cent deposit they need.

Notes to Editors

• The threshold for a ‘starter home’ is the lower quartile price of a terraced home in a potential first-time buyers’ region, or the median price of a flat in Outer London for those living in the capital.