Rachel Reeves unveils perpetual 95% home loan guarantee program
The UK government has announced a permanent Mortgage Guarantee Scheme, aiming to increase homeownership by encouraging lenders to offer mortgages with deposits as low as 5% (95% loan-to-value, LTV). This scheme provides lenders with a partial government-backed guarantee, offering support to both first-time buyers and home movers across the UK.
Key details and purpose of the scheme include:
- Permanent availability: Unlike previous temporary versions, the scheme is now permanent, restoring confidence for lenders to provide high LTV mortgages consistently through the economic cycle.
- Loan-to-Value and property value limits: Mortgages of 91% to 95% LTV will be supported. The scheme applies to properties priced up to £600,000, although there is some ambiguity about whether this property price cap applies to the new permanent scheme.
- Target groups: Primarily helps first-time buyers and home movers who struggle with large deposits.
- Government liability and lender contributions: The government’s contingent liability is capped at £3.2 billion, a level carried over from the Conservative government’s earlier scheme. Lenders are liable for the full mortgage and pay a commercial fee to participate in the scheme, which helps offset potential government losses.
- Guarantee duration: The government guarantee covers losses for up to seven years following mortgage origination.
- Impact so far: Since its initial launch in 2021, over 53,000 mortgages totaling £10.7 billion have been completed under the scheme.
- Rationale: The scheme addresses affordability challenges in the housing market, particularly the difficulty many aspiring homeowners face in raising sizeable deposits, especially in a volatile interest rate environment. It replaces the prior temporary scheme, ending the "stop-start" availability and providing steady market support.
The mortgage guarantee scheme will be available to lenders from July 2025. However, concerns have been raised that the scheme may exacerbate the problem of affording repayments, as it leaves buyers with a 95% mortgage to service. Rob Houghton, founder and CEO of Reallymoving, expressed this sentiment, stating that while the permanent mortgage guarantee scheme helps those with small deposits buy a home, it could potentially make repayments more challenging.
Chancellor Rachel Reeves has announced that more mortgages will be lent at over 4.5 times a home buyer's income. Currently, just under 10% of new mortgages issued exceed 4.5 times a borrower's income, and the Bank of England is happy for this percentage to rise, up to 15%. Guarantees will be valid for up to seven years after the mortgage is originated.
While the Mortgage Guarantee Scheme is a significant step towards increasing access to homeownership, increasing supply is the only way to make home ownership more affordable in the long term. Unfortunately, we're yet to see any dramatic increase in housing starts. The scheme's impact on the housing market and the affordability of homeownership remains to be seen.
- In light of the UK government's permanent Mortgage Guarantee Scheme, investors might consider opportunities in the real-estate sector, as the scheme encourages lenders to offer mortgages with low deposits.
- Given the increased demand for high LTV mortgages due to the scheme, personal finance experts suggest cautious investing in housing market to mitigate potential risks of loan defaults or market volatility.
- As part of the government's efforts to expand homeownership, the scheme supports personal finance by reducing the barriers for first-time buyers and home movers looking to invest in property with small deposits.
- The Mortgage Guarantee Scheme has a significant impact on personal-finance and real-estate market by promoting homeownership through low-deposit mortgages; however, concerns remain about the affordability of repayments for buyers with 95% mortgages.
