Mortgage ‘limbo’ warning with guarantee scheme ending today – which could make first time buyers ‘suffer’
By Jess Sharp, Money live reporter
The mortgage guarantee scheme comes to an end today and while the government has said a similar programme will be launched next month, there’s some uncertainty about what it will look like.
Brokers have accused the government of “complete incompetence” over its lack of detail, with some warning first time buyers will “suffer”.
The scheme was first introduced in the wake of the financial crisis, when options for people with small deposits dried up.
When the pandemic hit, it returned in a bid to boost the housing market as lockdowns lifted.
What does the scheme do?
It has been a lifeline for first time buyers and some home movers, allowing them to buy a property with a deposit as little as 5%.
As far as borrowers are concerned, a 95% mortgage operates in the same way, whether it is offered within the scheme or not.
But for lenders, the scheme provides a guarantee that means the government will shoulder some of the cost if they end up losing money on the property.
There are several rules that come with the scheme, which could potentially change when its replacement is introduced.
Only repayment mortgages for a main residential home in the UK that is worth £600,000 or less and is not a new build property can be covered under the scheme.
It has helped more than 53,261 people buy property, with at least 86% of them being first time buyers, government data shows.
What impact could its end have?
While low deposit mortgages are likely to still exist without the scheme, there are concerns that lenders could offer fewer of them.
“Giving lenders a government guarantee reduces their risk and encourages lenders to launch deals for those with only a small deposit,” David Hollingworth, associate director at L&C Mortgages told Money.
“Availability of those deals remains crucial for many in today’s market as they continue to face difficulty with affordability and saving a big deposit.”
He noted that many lenders do not rely on the scheme, so he doesn’t expect it to cause a huge problem for high loan-to-value lending.
But he added that the introduction of the permanent scheme would give lenders the confidence that if there is any further volatility to come, they wouldn’t need to regroup quickly to try to boost choice again.
Sean Horton, managing director at brokerage Respect Mortgages, said: “The government’s timing here is appalling.
“Lenders need certainty to plan their mortgage ranges. Without clarity on what’s coming next, expect some to quietly withdraw their 95% products. First-time buyers will suffer the most, as the scheme helped over 53,000 people onto the ladder. Let’s hope they wake up and announce something useful soon rather than leaving everyone in limbo.”
What has the government said?
Money asked the Treasury for more details about the new permanent scheme, which was confirmed in the spending review earlier this month.
But it said it had nothing to add to what was said by the chancellor.
“The government will launch a permanent, UK-wide Mortgage Guarantee Scheme in July to ensure the consistent availability of mortgages for buyers with small deposits,” Rachel Reeves said on 11 June.
On the same day, the economic secretary to the Treasury, Emma Reynolds, told the House of Commons that there will be a cap on the size of the government’s contingent liability of £3.2bn.
“Guarantees issued under the new, permanent scheme will be valid for up to seven years after the mortgage is originated,” she added.