UK Government Announce Mortgage Guarantee Scheme

UK Government Announce Mortgage Guarantee Scheme

The Government announced a new mortgage guarantee scheme in their budget last week which will launch in April. However, unlike previous schemes, the new one is not just limited to first time buyers or on new build homes, meaning existing homeowners can take advantage of it to move up the property ladder. It is hoped the scheme, which offers 95% mortgages on house purchases worth up to £600,000, will help to encourage buyers to move ahead with property purchases even if they have limited savings.

When Coronavirus first hit the UK, many lenders withdrew what they saw as risky high loan-to-value mortgages, leaving very few low-deposit mortgage options on the market. As 95% mortgages are more susceptible to falling house prices, they can leave the home-owner in negative equity where they owe more money than their house is worth and are potentially unable to pay back their loan or find a remortgage deal.

This new scheme will see the Government absorb some of the risk in an attempt to reinvigorate the housing market as happened with the previous Help to Buy mortgage guarantee scheme. The scheme, introduced by the Conservative Government in 2013 closed to new applications in 2016 but is thought to have helped more than 100,000 households take their first steps into home ownership. However, this new initiative works in a different way to the previous scheme, by allowing eligible buyers to purchase any property on the market, not just new builds.

It is part of Prime Minister, Boris Johnson’s “Generation Buy” effort to help young people escape the rental trap by making it easier for them to get onto the property ladder. Chancellor, Rishi Sunak said: “Owning a home is a dream for millions across the UK and we want to help as many people as possible. Saving up for a big deposit can often be difficult, and the pandemic has meant there are fewer low deposit mortgages available... [This is] a policy that gives people who can’t afford a big deposit the chance to buy their own home.”

The new scheme is most likely to appeal to those on above average salaries who are easily able to make mortgage payments, but have been unable to save for a large deposit. Those on lower than average salaries, may not be able to borrow enough to be able to take advantage of the initiative, even if they are able to save a bigger deposit. It is also more likely to help those in regions where rental payments are similar to mortgage payments and house prices are more in line with average salaries.

Rishi Sunak also confirmed that most of the big UK lenders have already agreed to offer mortgages via the scheme from April, but it is not yet clear what terms they might impose on them, but it is expected that interest rates are likely to be higher than lower loan-to-value mortgages as the lenders cover the additional costs of administering the scheme.

There are also concerns that the scheme may artificially inflate house prices. Housing charity Shelter, estimated that the previous Help to Buy mortgage guarantee scheme increased them by 1.4% as more people were able to afford to buy a house, but there wasn’t an increase in the number of houses available. When demand outstrips supply, prices inevitably go up, so the Government’s plans to increase the number of homes that are built are crucial to avoiding substantial price rises.

In 2020, house prices increased by almost £20,000 as the Government’s stamp duty holiday and lifestyle changes encouraged people to move. No-one can predict how the housing market will fare in the next few years, with some anticipating that the economic fallout and job losses from the pandemic will see house prices fall. Others believe that many are still keen to move house as they adjust to new ways of working and take advantage of the extended stamp duty holiday and now this scheme, keeping prices high for the foreseeable future. Only time will tell who is right, but one thing is for certain, now seems to be a great time to get a mortgage!