The government is extending the mortgage guarantee scheme, which is helping buyers with small deposits to access the property ladder, as rising borrowing costs threaten to dampen the UK property market in 2023.
The scheme, launched in April 2021, was touted as a way to help turn generational annuity into a “generational purchase”. It was due to end this month, but the government has said it will continue until the end of next year. The Treasury said the scheme had helped more than 24,000 households across the UK, with first-time buyers driving 85% of transactions.
The initiative supports banks and building societies that offer 95% loans, meaning buyers only have to raise 5% themselves, on a home worth up to £600 £000. These high loan-to-value (LTV) products are primarily used by first-time buyers who, given the skyrocketing growth in house prices seen in recent years, find it difficult to raise a down payment.
John Glen, the Chief Secretary to the Treasury, told families facing tough economic conditions, “it’s only right that we continue to help them secure their first home or move into their dream home.” “Expanding this program means thousands more are fortunate to benefit and supports the market as we navigate these difficult times.”
The program encourages lenders to offer these deals in times of uncertainty, as they can buy collateral on the portion of the mortgage between 80% and 95%. If a borrower gets into financial difficulty and their assets are repossessed, then the government will cover that portion of the lender’s losses.
These high LTV products are often withdrawn during turbulent times, as was the case during the pandemic when expectations of steep price drops spooked the market. As of January 2021, there were only a handful of 95% mortgage deals left for sale and the government said the scheme had helped restore consumer choice and competition, benefiting businesses and strengthening the market .
The number of 95% low-deposit mortgages on sale plummeted in the financial turmoil following the Kwasi Kwarteng mini-budget, and in the fall it emerged the government was considering expanding the scheme.
David Hollingworth, managing partner at brokerage firm L&C Mortgages, said given the current uncertainty – last week the Halifax lender predicted an 8% drop in property prices in 2023 – it would be “a wrong time” to withdraw government support. “You would remove a strut at a time when market activity is down and there are question marks over house prices,” he said.
When the guarantee scheme was introduced last year there was a 95% shortage of available mortgages and it acted as a catalyst to revive this part of the market, he said. “Now it’s more about not removing something that might risk affecting this market where the availability is still there.”
The mortgage guarantee system is different from the government purchase assistance system. Under the purchase aid, the government would lend a buyer between 5% and 20% of the total purchase price of a newly built home in England, or up to 40% in London.
The buyer still needed a 5% down payment, but the government loan meant taking out a smaller mortgage. However, the deadline for shopping assistance requests was October 31, and buyers must legally finish by March 31, when it officially ends.
