In last week’s Budget the Government announced the introduction of a 95% mortgage guarantee scheme. Here we’ll look at how it will work and what affect it might have on the market.
First, why has the mortgage guarantee scheme been introduced?
Over the last few years the Government have launched various measures to support the housing market. In launching this scheme they say ‘The Government is committed to supporting people who aspire to become homeowners.’ They add ‘This will enable more households to access mortgages on both new build and existing homes, without the need for prohibitively large deposits.’
Of course, the cynical might say there are votes to be had in measures which encourage people, including renters, to become home owners. Plus, developers and mortgage lenders stand to benefit from them too.
Why might such a scheme be needed?
On the face of it, high (and rising) house prices are the cause. In many areas, many buyers – particularly first time buyers – are only able to buy with high LTV mortgages.
In the past this wasn’t a problem. Banks and building societies were keen to offer 95% (and higher) LTV mortgages themselves. Now, however, as the economy has become very uncertain they are less keen to do so. Hence this latest scheme.
How the mortgage guarantee scheme will work:
The Government say this new scheme will be similar to the Help to Buy: Mortgage Guarantee Scheme that operated between 2013-2017 and which, they say, helped 100,000 people to buy.
In short, the scheme is being administered by National Saving & Investments on behalf of HM Treasury. However, borrowers will obtain their mortgage in the normal way from any bank or building society which participates in the scheme. This can be anything between a 91% and 95% LTV mortgage.
The lender will then be able to purchase a guarantee from the Government on the ‘top slice’ of the mortgage. This will apply down to 80% of the purchase price. Then, if the borrower defaults, the Government will compensate the lender for a portion of their net losses.
There are a few conditions to the scheme. The guarantee only runs for seven years – it is said that defaults are considered to be much less likely after this time. In addition, the borrower will likely have paid down sufficient capital after this time to make the guarantee ineffective.
Importantly, the scheme requires lenders to meet 5% of any losses above the 80% threshold.
This new mortgage guarantee scheme will only apply to residential mortgages (not second homes or buy to let mortgages) taken out by individuals (not companies) for up to £600,000. It is available to both first time buyers and subsequent purchasers on new build and existing properties. It must be a repayment mortgage which can be of any type – although a five year fixed rate product must be available within the lender’s range. The borrower must also meet the lender’s normal mortgage lending and creditworthiness criteria.
The scheme will operate between April 2021 and December 2022 but the Government has said it will review the situation towards the expiry date.
The Government has placed a cap of £3.9 billion on its liability under the scheme. However, it is intended that the scheme will be commercial and self-financing by way of the fee the Government will charge lenders for the guarantee so, theoretically, should cost them nothing.
So, what impact will this new mortgage guarantee scheme have on the property market?
The scheme should immediately increase the availability of high LTV mortgages. That should mean more people will be able to get a mortgage and buy a house. First time buyers who have been struggling to buy may find they are able to this summer. Next steppers, especially those who have bought fairly recently with high LTV mortgages, may find they can afford to move again if they want or need to.
There are a few possible catches however ....
Firstly, banks and building societies do not have to take part in the scheme or, if they do, can pull out of it if they wish to. So far It is reported that Lloyds, NatWest, Santander, Barclays, HSBC and Virgin Money will participate. It is important to note that the scheme involves a cost and risk to lenders, which they will no doubt be keeping close tabs on.
Secondly, it may not be as helpful to home buyers as it appears due to the level of property prices in many areas. For example, to buy a £400,000 property in London on a 95% mortgage still means the buyer needs a £20,000 deposit. Even if they have £20,000 buyers may not meet the usual income and creditworthiness criteria for a £380,000 mortgage. In cheaper areas, such as those where there is a good selection of properties available for well under £200,000, the scheme may not be needed anyway.
Lastly, there is a risk that the new mortgage guarantee scheme will cause house prices to rise even further.
The scheme could actually mean that buyers will need a bigger deposit and will need to take a bigger mortgage than without the mortgage guarantee scheme. Longer term, it could mean their home could cost them a lot more. It could mean that some buyers, especially first time buyers, are even less able to buy a home than they are now.
It is probably fair to say that the new mortgage guarantee scheme will be welcomed by many in the property industry. In the short term at least there will be benefits. It should help keep the housing market moving, and benefit buyers, sellers, lenders and agents too. However in the long term it should be remembered that – as with any kind of intervention that stimulates demand – there could be consequences too.