A 2.5 per cent deposit is a trap, not a ladder

The first people to profit from Andy Burnham’s plan to help young people buy homes were neither young nor buying. On Monday morning, two days after the prime minister unveiled Your First Home, shares in Britain’s big listed housebuilders jumped, adding about £2bn to their value.

Investors had read the scheme correctly. Under the plan, first-time buyers in England would be able to buy a new-build home with a 2.5 per cent deposit, topped up by a government equity loan worth 20 per cent of the price and interest-free at first. Details are due in the Budget on 28 October.

That gives the Treasury four weeks to fix the scheme’s one serious flaw. The problem is not the equity loan, which the government’s own evaluators now say was good value the last time it was tried. It is the deposit. Halving it to 2.5 per cent, just as borrowing costs turn upwards, risks leading thousands of young buyers into negative equity. Burnham should put the minimum back to 5 per cent.

Start with the arithmetic. On a £300,000 new build, a Your First Home buyer puts in £7,500 and takes a mortgage of £232,500. Because the government’s loan rises and falls with the home’s value, it shares some of any loss, but the buyer carries most of it on a very thin stake. A fall in value of just over 3 per cent wipes that stake out.

The fall may come the moment the paint dries. The official evaluation of Help to Buy, published this month, found that homes bought through that scheme cost about 6 per cent more than similar second-hand homes. If a Your First Home buyer’s house is worth only what a comparable older property would fetch, they owe roughly £6,000 more than it is worth before the market has moved at all. A buyer with Help to Buy’s 5 per cent deposit, in the same position, would stay just above water. That is the difference the extra 2.5 per cent makes.

Now look at the market the scheme will be launched into. The Bank of England held interest rates at 3.75 per cent this month, with three of its nine members voting to raise them, and it expects inflation to climb above 4 per cent early next year as the energy shock from the Gulf feeds through. Lenders have raised fixed mortgage rates repeatedly this month. Lloyds, which now publishes the old Halifax index, recorded in August the first annual fall in house prices since 2023. Analysts say the scheme needs to be running for the 2027 spring selling season, which would bring buyers in just as rates may peak.

Britain has run this experiment before. In his March 1988 Budget, Nigel Lawson announced that unmarried couples would lose the right to combine their mortgage tax relief from August. Buyers rushed to beat the deadline: the number of mortgages taken out in the middle of 1988 was a fifth higher than a year earlier, and many first-time buyers borrowed 95 per cent of the price. Interest rates then doubled, reaching 15 per cent by October 1989. Prices fell, negative equity peaked at about 1.8 million households, and repossessions rose from around 15,000 in 1989 to 75,000 in 1991. The people hurt most were the young buyers the market had hurried in at the top.

To be sure, Help to Buy’s defenders have a strong case. The evaluation estimates the scheme generated £25.1bn of social value and accounted for about 15 per cent of new homes built while it ran. They would add that the deposit is the wall most young people without wealthy parents hit, and £7,500 is far easier to save than £15,000. Negative equity only bites when you need to sell or remortgage, and lenders today stress-test borrowers far more strictly than they did in 1988.

But Help to Buy launched in 2013 into a decade of near-zero interest rates and rising prices, a tailwind that flattered most of the buyers who used it. The evaluators say plainly that conditions are very different now, with higher inflation and higher rates. Their findings also suggest that once rates climbed in 2022, monthly repayments rather than deposits became the main barrier for many would-be buyers. A smaller deposit does nothing about that; it only means a bigger mortgage. And the moment negative equity bites, when a five-year fix ends, a baby arrives or a job moves, is exactly when young buyers most need room to manoeuvre. A buyer trapped in a home worth less than the loans on it struggles to remortgage onto a better deal and cannot easily move for work. A scheme meant to open the housing ladder should not leave people stuck on its bottom rung.

A 5 per cent deposit would still make home ownership easier than it is today, and it would give buyers a cushion if prices slip. The new First Time Buyer ISA, due in 2028 with a government bonus and no withdrawal penalty, offers a way to help people build that deposit rather than skip it.

Housebuilders’ shareholders have already had their good week. The Budget on 28 October is the chance to give buyers a good decade. The Treasury should put the deposit back to 5 per cent and give first-time buyers the one thing the shareholders never needed: a margin for error.

The strongest case against

The government and housebuilders would say the essay mistakes a paper loss for a real one. Negative equity only matters to someone who must sell or remortgage, most buyers stay put for years, and the government’s stake absorbs a fifth of any fall. Waiting to save a bigger deposit has costs too: they would argue it means years more rent for the very people the scheme targets.

They would add that Help to Buy customers were overwhelmingly happy with their homes, according to the same evaluation, and that lenders’ affordability tests now screen out borrowers who could not cope with higher rates.

The empirical dispute: nobody knows which way prices go next. Two major indices disagreed in August, one showing a small annual rise and the other a small fall. If prices keep rising, the thin deposit costs buyers nothing, and this essay’s warning will look overcautious.

Sources

• The Telegraph, via AOL, 28 September 2026: the £2bn share rise, the scheme’s terms, the spring 2027 timing
• Tembo Money, 29 September 2026: the scheme’s terms, the £300,000 example, the First Time Buyer ISA
• AOL, 26 September 2026: the announcement and the Conservatives’ criticism
• MHCLG: Evaluation of the Help to Buy scheme, 15 September 2026: the new-build premium, value for money, share of new homes, changed conditions, monthly affordability, customer satisfaction
• Bank of England, September 2026 Monetary Policy Summary and House of Commons Library: the rate decision and inflation forecast
• HomeOwners Alliance: lenders raising fixed rates in September
• Prince Surveyors and Survey Merchant: Nationwide’s rise and Lloyds’ annual fall in August
• Wikipedia: 1988 United Kingdom budget, Wikipedia: MIRAS and lovemoney: the 1988 rush, 95% mortgages and base rates to October 1989
• Financial Reporter and The Spectator: the early-1990s negative equity peak of about 1.8 million
• Resolution Foundation, Under water, 2020: repossessions in 1989 and 1991