The government is working to extend the Mortgage Guarantee Scheme, which helps buyers with small deposits up the property ladder as higher borrowing costs threaten to put the brakes on the UK housing market in 2023.
Launched in April 2021, the scheme has been described as a way to help convert generation rent into ‘generation buy’. It was due to end this month but the government said it would continue until the end of next year. The Treasury said the scheme has helped more than 24,000 households across the UK, with first-time buyers behind 85% of deals.
This initiative is supported by banks and building societies who offer 95% loans, meaning buyers only have to collect 5% themselves, on a home worth up to £600,000. These highly valued Loan-to-Value (LTV) products are mostly used by first-time buyers who, due to the rapid growth in home prices seen in recent years, are struggling to increase deposits.
With families facing difficult economic conditions, John Glenn, Chief Minister of the Exchequer, said, “It is right that we continue to help them secure their first home or move into their dream home.” “Expanding this system means allowing thousands more to benefit, supporting the market as we navigate these challenging times.”
The scheme encourages lenders to offer these deals in uncertain times as they can purchase collateral on a portion of the mortgage between 80% and 95%. If the borrower encounters financial difficulties and his property is repossessed, the government will then cover that portion of the lender’s losses.
Higher LTV products are often pulled during times of turmoil as was the case during a pandemic when expectations of significant price declines frightened the market. By January 2021, there were only a handful of 95% mortgage deals left for sale, and the government said the scheme helped restore consumer choice and competition, which benefited businesses and boosted the market.
The number of low-deposit mortgages fell by 95% for sale in the financial turmoil that followed Kwasi Quarting’s mini-budget, and in the fall it emerged that the government was considering extending the scheme.
David Hollingworth, associate director at brokerage L&C Mortgages, said that given the current uncertainty — the Halifax lender last week predicted an 8% drop in house prices in 2023 — it would be “bad timing” to withdraw government support. “You would have removed a pillar at a time when market activity is low and there are question marks about home prices,” he said.
He said that when the guarantee scheme was introduced last year, there was a 95% scarcity of available mortgages and it acted as a catalyst to bring that part of the market back to life. “Now it’s a case of not pulling something that could risk impacting that market where the availability is still there.”
The mortgage guarantee scheme differs from the government’s help-to-buy scheme. Under Help to Buy, the government will loan the buyer between 5% and 20% of the full purchase price of a newly built home in England, or up to 40% in London.
The buyer still needed a 5% deposit but the government loan meant getting a smaller mortgage. However, the deadline for submitting Help to Buy applications was October 31, and buyers must legally complete them by March 31 when it officially ends.
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