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Mortgage guarantee scheme permanence only addresses part of the puzzle, brokers say

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  • 07/06/2024
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Mortgage guarantee scheme permanence only addresses part of the puzzle, brokers say
Experts say Labour's plan to make the mortgage guarantee scheme is a good first step, but doesn't address key issues first-time buyers face.

Labour announced that it would make the mortgage guarantee scheme permanent, noting that it would help a further 80,000 young people on to the property ladder.

The mortgage guarantee scheme was launched in 2021 and was supposed to end in December 2023, but was extended in last year’s Autumn Budget to 2025.

Since the scheme went live, 42,387 mortgages have been completed through the scheme. This accounts for 1.3% of all residential mortgage completions, and 85% of the purchases were made by first-time buyers.

Kate Davies, executive director of Intermediary Mortgage Lenders Association (IMLA), said that a shortage of 95% loan-to-value (LTV) mortgages was “not the issue in today’s market”, with more than 300 deals available at this tier currently.

She explained: “When the mortgage guarantee scheme was introduced during the pandemic, mortgage funding was restricted, and many lenders withdrew from the riskier (and more high-maintenance – so more time-consuming) end of the lending scale in response to economic uncertainty.

“The scheme did boost the number of 95% LTV loans on offer at the time, but mainly from the bigger lenders, under some pressure from the government. It is not a great scheme from the lenders’ perspective, as it is expensive for them to use, and exclusive – signatories to the mortgage guarantee scheme are not permitted to combine these with 95% LTV loans backed by their own cheaper, private insurance schemes.”

Davies continued that there were “plenty” of 95% LTV mortgages offered by a number of large and small lenders without the government’s “expensive scheme”, however, first-time buyers still need to meet affordability requirements.

“The higher-LTV space is further restricted by the arbitrary ‘flow limit’ imposed by the Bank of England on mortgage providers who lend more than £100m a year. This limit prevents them from lending more than 15% of their home loans at more than four-and-a-half times the borrower’s income,” she added.

Davies said that IMLA figure showed that 54% of prospective first-time buyers needed a mortgage at or above this limit, and in London this figure was nearer 80%.

She continued that lending at higher income multiples was “not irresponsible” as affordability assessments would still need to be met, but once a lender nears the 15% ceiling, they “need to jam on the brakes and stop lending at that level – because to exceed it would incur penalties imposed by the regulators”.

“Reviewing and increasing the loan-to-income [LTI] flow limit would be a far more effective way of increasing the availability of higher-LTV mortgages to first-time buyers than perpetuating the mortgage guarantee scheme.

“We’d happily talk to Labour’s – and other parties’ – policymakers to explain this issue to them in more depth. It’s in all our interests to improve the position for first-time buyers,” Davies concluded.

Karen Noye, mortgage expert at Quilter, said that the mortgage guarantee scheme had so far only been “marginally impactful”, as the LTI cap with an average salary means mortgages of £150,000 were available, which “doesn’t offer much choice in the current market”.

“Often, saving for a larger deposit or receiving financial help from family provides more options. Additionally, high-loan-to-value ratios increase the risk of negative equity, especially if house prices fall. This could leave new homeowners in a difficult position if they need to sell their property, as they would have to cover the negative equity, moving costs, and a new deposit,” she added.

Noye said that housebuilding plans would be the “key piece of the puzzle”, as “increasing the supply of new homes, it will make homeownership more accessible to a broader range of people”.

 

Mortgage guarantee scheme and similar have ‘limitations’

Jeremy Leaf, North London estate agent and a former Royal Institution of Chartered Surveyors (RICS) residential chair, said that the move was “potentially good news”, adding the proposed planning reform and improving housing supply was also welcome.

He continued: “Sadly, we have heard similar announcements from both main political parties in the past where the end result doesn’t match the rhetoric. In our view, there is little point in coming to the aid of first-time buyers unless there is sufficient choice of properties for them.

“Otherwise, the outcome will simply be further house price inflation, which will make it even more difficult for young people coming along in future years.”

Leaf said that it would like to see further detail, but was pleased “housing has finally seemed to be making an appearance in the election debate and not before time”.

“There are many difficult decisions [that] need to be taken to improve the balance between supply and demand, and particularly of affordable housing, including more balance in the system,” he added.

Tim Bannister, Rightmove’s property expert, said that it welcomed policies and innovations that were “trying to help more first-time buyers onto the ladder”.

He said: “However, we know from our own research that policies like the mortgage guarantee scheme have limitations, and are only able to help a very small pool of future first-time buyers that fit specific requirements. One of the biggest barriers for first-time buyers is being able to borrow enough from a lender, which a mortgage guarantee scheme doesn’t address.”

Matt Smith, Rightmove’s mortgage expert, added: “We think there is a greater opportunity for the next government to review the mortgage affordability criteria in a responsible way. Longer-term solutions need to be prioritised over short-term fixes to help more first-time buyers to get on to the ladder, especially those who are trying to buy on their own.

“Whilst continuation of this kind of support and making it attractive to lenders to offer it is helpful, it should be the first step amongst many in helping first-time buyers.”

This was echoed by Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, who said: “Housing policy is like building, it’s developed over time. This is a positive first proposal from Starmer, but things need to be bigger and bolder, and there is plenty of scope.

“A buying scheme to the scale of Help to Buy, but with innovation, is ripe for announcement and homebuilder incentives, not just targets, should be released. Labour have an open goal they need to take advantage of here, but they are at risk of fluffing their shot.”

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