Extension of the UK Mortgage Guarantee Scheme by one year

First-time home buyers or those with small deposits will get an extra year to benefit from the UK government’s Mortgage Guarantee Scheme after ministers postponed its closure until the end of 2023.

The guarantee is designed to give banks and building societies the confidence to lend to low-deposit and first-time homeowners, who have seen their borrowing options dwindle in the wake of rising mortgage rates over the past year and concerns about recession and the outlook for home prices.

Lenders pulled several products with high loan-to-value ratios as the housing market picture darkened. Halifax said last week that it expects house prices to fall 8 per cent in 2023.

The number of fixed and variable mortgage products available to residential buyers with a 5 percent deposit has more than halved, from 353 on Dec. 1, 2021, to 130. For those with a 10 percent deposit, their options have shrunk from 706 mortgage deals to 467, according to website data. Financial Moneyfacts.

The government scheme was launched last year during the pandemic, as lenders fled the market for low-deposit loans amid widespread uncertainty over the housing outlook, and was due to close at the end of this year. It provides security on the mortgage portion of more than 80 per cent for properties up to £600,000 in value. Buyers must have a deposit of at least 5 percent.

From the launch of the scheme in April 2021 to June 2022, it has helped 24,153 buyers purchase a home, of which 85 per cent were first-time buyers. The total value of mortgages backed by the initiative over that period was £4.4 billion, according to Treasury data.

Mortgage rates have fallen slightly since former prime minister Liz Truss’ September “mini” budget unleashed turmoil in bond markets and pushed home loan rates to their highest levels since the 2008 financial crisis.

However, it is still much higher than this time last year, with the average rate on a two-year fixed-rate deal just under 6 percent compared to 2.4 percent in December 2021, Moneyfacts said.

The government said it was right to continue its support for families facing “the difficult economic conditions today”. “Extending this scheme means thousands more have the opportunity to benefit, supporting the market as we go through these challenging times,” said John Glenn, Chief Secretary of the Treasury.

David Hollingworth, a director at mortgage broker L&C, suggested that the government’s original timetable for withdrawing the scheme now appeared to be out of market sentiment.

“It might seem like an unusual timing to pull it when you have lower activity levels, and consumer confidence is hurting by the impact of the ‘scaling’ budget and uncertainty ahead along with the rising cost of living,” he said.

The news was welcomed by UK Finance, the trade body for the country’s financial sector. “We look forward to continuing our work with the government and existing lenders on the scheme,” said Charles Rowe, director of mortgages at UK Finance.

The Guarantee scheme is set to close two months after Help to Buy, a separate government housing subsidy scheme, ends for new applicants at the end of October.

The Help to Buy Isa, a savings product for first-time buyers, closed to new applicants in November 2019 but the Isa for Life, where savings are backed by the government and can be used for a housing deposit or held until retirement, remains available.

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