Who’d be Rishi Sunak? The Chancellor has an incredibly tough job right now. Rescuing the economy from the pandemic requires the balancing skills of a trapeze artist, the cunning of a fox, and if we’re being honest, the luck of a EuroMillions lottery winner. So what dice did he roll in this week’s Budget?
The headline news for property professionals was the Stamp Duty Holiday extension, which we discussed here, plus the subject of today’s blog: the new Mortgage Guarantee Scheme. But what exactly is it? How does it work? Who will it help? And what impact is it likely to have? We reveal all below…
What is it?
Starting in April this year, and lasting until the end of 2022, the Mortgage Guarantee Scheme will cover lenders’ losses on mortgages of up to £600,000 if a borrower defaults on their payments. Rishi’s scheme specifically applies to 95% loan to value (LTV) mortgages. These are mortgages where borrowers only need to put down 5% of the property’s purchase price as a deposit.
Because these low-deposit mortgages represent a higher risk for lenders, financial institutions have been reluctant to offer them in the current economic climate. The Chancellor hopes that by promising to cover some of their potential losses, lenders might be persuaded to offer 5% deposits after all – thus enabling more people to buy.
How does it work?
This scheme is different from the existing Help To Buy Equity Loan Scheme. The latter, which was extended until 2023 for first-time buyers, is where the government lends borrowers 20% of the cost of a new build home. The Mortgage Guarantee Scheme, on the other hand, doesn’t deal with buyers directly; it simply offers lenders extra peace of mind.
From the buyers’ point of view, the benefit will be the ability to secure a mortgage with a low deposit in challenging economic circumstances. They will still need to go through the usual checks and prove they can afford the monthly repayments though.
Why is it needed?
Mortgage lenders understandably get pickier over who they lend to during economic slowdowns. Therefore, low deposit mortgages have all but disappeared since Covid-19 raised its ugly head last year. Indeed, most lenders have only been offering 90% loan-to-value mortgages, which obviously require a 10% deposit. Younger first time buyers have often required deposits of 15% or more.
This has made things incredibly tricky – especially for buyers in areas where property prices are high. Take London, for example, where the average price is nearly £500,000. Because lenders normally only offer mortgages of up to 4.5 times a buyer’s salary, you would need an income (or a couple would need a combined income) of over £100,000 per year to actually receive a mortgage offer. That’s a big ask.
What’s more, although lenders’ stance isn’t unprecedented - low deposit mortgages also became rare after the 2008 financial crash, which prompted David Cameron’s government to introduce the aforementioned Help To Buy scheme - this time the situation has been exacerbated by a backlog of mortgage applications.
Who it helps?
In announcing his Mortgage Guarantee Scheme, the Chancellor said it was “a policy that gives people who can’t afford a big deposit the chance to buy their own home”. And he’s not wrong. The ability to buy a home worth up to £600,000 with a low deposit mortgage will help anyone who’s looking to trade up or get on the property ladder for the first time.
According to Rightmove, 86% of properties listed on the UK’s busiest property portal are valued below £600,000; therefore this is good news for large swathes of people. With prices increasing faster than wages in recent years, securing a mortgage has become harder and harder; therefore this should bring joy to first time buyers in particular.
So it’s a win-win?
It’s definitely positive news but there are some concerns. For example, those with low-deposit mortgages are at greater risk of tumbling into negative equity. And with many experts predicting that property prices could fall this year, some borrowers could end up owing more than their property is worth.
What’s more, the leader of Her Majesty’s Most Loyal Opposition is not impressed. In his response to the Budget, Sir Keir Starmer accused the Chancellor of “lifting a failed policy from eight years ago”. Although George Osborne’s scheme was different, the policy did seem to increase property prices. And if history repeats itself with the Mortgage Guarantee Scheme, it could make houses less affordable in the long run.
What impact will it have?
Thus far, the reaction has been positive. For example, Rightmove reported an 85% increase in the use of their mortgage calculator facility immediately after the Budget. This suggests that a surge in demand is on the way – a surge that should buttress property prices during the rocky times to come.
Although there aren’t currently enough properties coming to market to meet this extra demand, Rightmove’s resident expert Tim Bannister believes that the number of people able to upsize should bring more properties to market lower down the property ladder.
However, none of this will matter, of course, if lenders ultimately decide that the Mortgage Guarantee Scheme isn’t quite enough to persuade them to offer 5% deposits after all. Although big boys like Lloyds, Santander, Barclays, HSBC, and NatWest are currently backing the scheme, we don’t know how long for, nor whether other lenders will jump on the bandwagon.
Consequently, there’s a chance that the Mortgage Guarantee Scheme could result in nothing but tumbleweeds. After all, nothing’s truly guaranteed in these topsy-turvy times.
And on the topic of mortages, you can learn what we think about negative interest rates here.