Jan 4, 2018

In the last Autumn Budget, stamp duty was abolished for first-time buyers on homes under £300,000. Good news for lots of people, but to what extent will this help you gain a foothold on the property ladder?

Chancellor of the Exchequer Philip Hammond’s announcement in the Autumn Budget on 22nd November, on a new stamp duty relief for first time buyers, effective immediately was quickly followed by a report from the Office of Budget Responsibility (OBR) showing the policy change may push up house prices. So, how likely are you to benefit – and how much cash will you have in hand?

People buying their first home for less than £300,000 will no longer be required to pay stamp duty. Those buying for between £300,00 and £500,00 will pay 5% on any amount above £300,000, while those spending more than £500,000 will get no tax relief at all.

But with these changes in effect, how will they benefit you? In the OBR report issued, it was revealed that analysis showed that the new policy would only serve to push up house prices.

The OBR estimated prices would rise by 0.03%, or a one-to-one basis with any savings buyers may make. This is based on previous market movements after ‘stamp duty holidays’ – and in fact, the OBR predicted that a permanent relief may inflate prices even higher. But first-time buyers will also have more cash available for their deposit, meaning they are likely to be able to afford these higher prices. In particular, buyers with small deposits, who are currently constrained by low incomes, may find it easier to buy. Still, those who already own property are most likely to profit, the OBR warned.

To put it in much simpler terms, assuming the OBR’s predictions are correct, the average first-time buyer is likely to have more cash available, under the new rules – although doesn’t necessarily mean they can buy a home quicker. For example, those who bought houses in the Northern regions, North West and Yorkshire & Humberside, a large portion of buyers paid no stamp duty, due to the threshold not being met under the old stamp duty rules, so any changes will unlikely impact them.

Delving deeper into the changes and how much we can actually save, looking at the England-wide average, the median first-time buyer pays around £177,976, with a deposit of £28,476 – meaning a loan-to-value (LTV) ratio of 84%. This buyer would have paid stamp duty of £1,059 prior to the changes. If house prices were to increase by 0.3%, that price would edge up to £178,510. To buy at the same LTV, the buyer would need a deposit of £28,561. Given the stamp duty bill will be reduced to zero, that buyer would have just an extra £977 in their pocket – which may add to their deposit, but is hardly likely to have a significant impact.

During his speech on the new reforms, Mr Hammond singled out the London market as particularly challenging for first-time buyers, as rapidly rising prices push many people out of the capital. . London is the only market where the average first-time buyer spends more than £300,000 – figures from UK Finance show first-time homes have a median price of £366,666. But interestingly, buyers in London also tend to borrow at the lowest LTV, on average around 75% – putting the median deposit at a whopping £91,666. This could be explained by affordability constraints – even comparatively high London salaries may be insufficient to service a bigger loan. Data from Royal London also shows that up to 39% of first-time buyers in London have been gifted part of their deposit, the highest rate in the country. For the average London buyer, the previous stamp duty they would have paid would have been £8,333. Under the new rules, even if prices edged up by 0.3% – to £367,766 – they’d be paying just £3,383 in stamp duty. That, therefore, means these buyers would be close to £4,675 better off, even with the need to find a higher deposit. But while this demonstrates that Londoners are likely to benefit most, they still need to get together that mammoth deposit.

Will stamp duty cuts help people with small deposits? In short yes and no. OBR has distinguished the fact that those with small deposits and limited incomes are likely to benefit the most from the new rules. A couple with a deposit of £20,000 could apply for a £200,000 mortgage at a 90% LTV – but they would still need a joint income of £60,000 or more to be considered. With the new stamp duty changes, these buyers would have an extra £1,500 in cash – which they could inject into their deposit, bringing down the value of the loan required. But given the small sums involved in the bigger picture, it may only marginally help speed up the savings process.

Previous stamp duty changes The OBR analysed the effects of previous stamp duty reforms – in particular, the two-year ‘stamp duty’ holiday introduced in September 2010 for homes under £250,000. During this period, HMRC published a report concluding the policy had ‘no significant impact’ on the affordability of residential property and most buyers would have purchased property anyway.

Indeed, an analysis of the number of first-time buyer in the past 12 years shows that, while there was a slight rise immediately following the 2010 reforms, and a slight dip when the temporary relief came to an end, the number of buyers continued to improve post-2008. It’s likely the economic recovery post-Financial Crisis is behind this trend, rather than stamp duty policy changes. Stamp duty is a popular reform for chancellors looking to stimulate the housing market. In 2014, Chancellor George Osborne announced he was removing the ‘slab element’ of stamp duty – meaning it would now be paid at different rates after certain thresholds, rather than at one rate on the whole amount. In the 2015 Autumn Statement, Mr Osborne also introduced a 3% surcharge on second homes, including buy-to-let properties.

How can you afford your first home?

If you’re being priced out of the property market, it’s worth considering all your options. The government introduced it’s Help to Buy scheme give newcomers to property a leg up in saving a deposit. A number of affordable housing schemes also help first-time buyers – either through shared ownership, or selling below market value. And if you have family who may be able to co-sign your loan, you could take advantage of a guarantor or family mortgage. Take a look at our blog on the different government help to buy schemes for further information, here.

So to sum up, low earners in some instances and Londoners are most likely to profit from new rules.