Let first-time buyers use pension pots or student loan-style schemes, Hunt urged

Jeremy Hunt should allow first-time buyers to borrow deposits from the Government through a student loan-style scheme or use their pension pots to get on the property ladder, a Tory MP has said.

Natalie Elphicke, Conservative MP for Dover and head of housing delivery at cross-party industry group the Housing and Finance Institute (HFI), is urging the chancellor to prioritise first-time buyers in the Budget next month.

She told i: “Helping young people and families onto the housing ladder must be a national mission”.

In a new report from the HFI, shared in full exclusively with i, Ms Elphicke calls on Mr Hunt to deliver a “Budget for Housing” in which help for first-time buyers to raise a mortgage deposit via Government deposit loans and pension transfer schemes is a “key priority.”

Such support could mean an extra 30,000 people can become homeowners a year, the HFI claims. She is also calling on the Government to urgently build more social housing and says this would boost the economy.

The deposit loans would be repayable through the tax system, in the same way that student loans are given to pay tuition fees upfront and then repaid every month after graduation.

The pension transfer scheme would allow younger people to set aside enough to cover a typical deposit by transferring pension contributions to a home deposit ISA.

“It’s really important that first-time buyers have flexibility,” Ms Elphicke said. “The different schemes give people options.”

“Not everyone will go to university, but everyone will have the opportunity to buy their own home,” Ms Elphicke added. “An extension of that style of scheme could be really helpful to younger people.”

Neither proposal is risk-free, however.

Living costs remain high and repaying a government loan or sending funds back to a pension pot alongside a mortgage could be challenging, even for middle earners bringing home between £30,000 and £60,000. According to the research body the Financial Fairness Trust, this demographic is already struggling to “maintain a decent living standard”.

The upside of these proposals, though, are that they would offer young adults flexibility.

Raising a deposit is a major challenge for first-time buyers who do not have access to family wealth and one of the reasons that a growing number of young adults remain caught in the “private rent trap” in their 30s and 40s.

This is because house prices across the UK remain at historic highs in relation to average earnings despite small falls, particularly in London and the southeast of England.

According to the latest data from the Office for National Statistics (ONS), the average house price in England the average house price in England is around £275,000. The average annual disposable household income is £33,000.

This means that the average first-time buyer needs to borrow 8.4 times their salary while banks will generally only lend a maximum of 4.5 times a person’s income for a mortgage.

On top of borrowing a mortgage, other costs such as a deposit, stamp duty, and legal fees must be considered.

The average first-time buyer generally requires a deposit of between 5 per cent and 10 per cent. That’s between £11,500 to £22,500 before stamp duty and other moving costs which a potential homebuyer must save while paying private rent which in London can exceed £2,000 per month.

A growing number of people are now locked out of homeownership and at least a third of people in the millennial generation will be renting ‘from cradle to grave’.

Former pensions minister Steve Webb, now a partner at pensions consultants LCP, said that allowing young adults to use pension contributions to buy a home could “make them feel more positive about pension saving” in general.

Any policy which “reduces the risk of young people becoming renters in retirement could be a valuable part of their long-term financial planning”, he added.

The fact that so many young adults are locked out of homeownership due to these historically high housing costs has become a huge concern for the Conservative Party who, since Margaret Thatcher’s government, have positioned themselves as the party of home ownership.

Housing Secretary Michael Gove warned recently that if nothing is done, young people will not feel that “democracy and capitalism are working for them”.

Ms Elphicke and the HFI are not the only body to suggest that allowing first-time buyers to access their pension pots to build deposits would be one solution to this problem.

In a report published earlier this month, the independent think tank Resolution Foundation argued for a slightly different scheme to that proposed by the HFI whereby young adults could withdraw directly from their pensions.

Molly Broome, an economist at the independent think tank Resolution Foundation said that allowing young people to borrow from their pension pots is a “good idea”. As long as the sum borrowed is repaid.

Making people’s pension pots “more accessible during their working lives” via loans that can be repaid would offer much-needed flexibility, the Resolution Foundation has said.

“People should be able to take loans from their own pension savings which they can use for whatever purpose so long as the money is repaid over an agreed number of years,” Ms Broome said.

The Resolution Foundation also notes that this approach already works well in the US, where around one in five people have a loan against their pension at any one time. And around 90 per cent of these loans are repaid in full and with interest.

However, there are practical obstacles to implementing either scheme.

“One barrier is that policy on housing, pensions, and saving is spread across multiple Government departments,” Mr Webb concluded. “We urgently need some joined-up thinking across Government to make sure that the various savings needs of younger people in particular can be better met than at present.”

At present, the Government is not considering allowing young adults to use their pension pots to buy homes.

Sir Steve Bullock, chair of the HFI, and former Labour Mayor of Lewisham, warned that the housing crisis is getting worse.

“The measures in [our] report are practical steps that can be taken in the Budget to end the housing crisis,” he said.

Hunt is rumoured to be considering a Government-backed scheme to allow first-time buyers to purchase homes with 1 per cent deposits by taking out 99 per cent mortgages. Experts have said this proposal to introduce high levels of borrowing is risky, both for those who take it up and for Britain’s financial systems because it increases the chances of negative equity – this is where the loan someone takes out to buy a home is greater than the value of their home.

i has approached the Treasury for comment.