Opinion: mortgage guarantee scheme only makes life harder for buyers

The Government is taking on the risk of offering 95% mortgages in a bid to increase options for low-deposit borrowers.

The Government’s new mortgage guarantee scheme goes live this week.

The idea of the scheme is that it will make homeownership more attainable for would-be buyers with only a small deposit. Lenders can offer mortgages at up to 95% loan-to-value, meaning buyers only have to stump up a 5% deposit.

And they are being enticed into doing so as fact that the Government will guarantee the loan. In other words, Rishi Sunak and co are promising to pick up the financial slack for loans that go wrong.

The scheme is available on properties worth up to £600,000, and a succession of lenders over the last few weeks have announced that they will be participating, or sharing details of the new products that will tie into the scheme.

Miguel Sard, managing director of home buying and ownership at NatWest, said that the buyers with small deposits are usually younger of first-time buyers, and have likely been hardest hit by the pandemic.

He added: “A Government-backed scheme will help segments of the market for whom homeownership has felt far out of reach in recent months.”

Why house prices keep surging despite the pandemic

Giving demand another helping hand

The obvious problem with this scheme is that it doesn’t really solve anything.

The principal reason that the scheme has been launched is that building a decent-sized deposit is difficult. Part of that is simply that many of those who would love to own their own home are having to get by with reduced incomes as a result of the pandemic.

But the bigger cause is the fact that house prices keep rising, meaning what you thought was enough for a 10% deposit a month ago is now no longer sufficient.

In fact, the escalation in house prices over the last year is little short of staggering. 

According to the latest Nationwide house price index, annual house price growth stands at 5.7%, which is quite something given we’re still in a pandemic.

Of course, a significant factor in that growth is the Stamp Duty holiday introduced by the Government, which once again is aimed at boosting demand for homes.

As with the mortgage guarantee scheme, by bumping up demand for the limited number of properties on the market, all that happens is that prices continue to rise.

It’s because those prices keep moving further out of the reach of normal buyers that we end up needing more schemes that help people who can only get together a small deposit.

In effect, it’s a short-term solution to a long-term problem, and it’s not going near the root of the actual issue.

Grasping the supply problem

It’s absolutely true that lenders have stepped back from high LTV mortgages since the pandemic, viewing them as a risk too far as the economy gets back on its feet.

So there is a certain logic to a guarantee scheme like this, which will prod them into relaunching those deals.

But let’s be honest, the problem with the housing market isn’t the shortage of high LTV deals, it’s the shortage of homes themselves.

We haven’t built enough homes to meet demand in decades, and despite plenty of good talk from this Government ‒ rather like its predecessors ‒ there is still scant sign of that supply issue being tackled in any real way.

There are certain drawbacks to actually kickstarting a proper homebuilding programme for politicians.

Firstly, it takes a while to show any real results. Building a property takes time.

And given the revolving door of housing secretaries, we have had over the last two decades, by the time the ink has dried on the announcement of a new housebuilding drive, the minister has likely moved onto an even more glamorous brief, like secretary of state for WiFi or minister for buses.

Then there’s also the sticky issue of where the homes are built. It’s very easy for people to say they want more homes to be built, but as soon as it’s suggested that they are built in their local area, suddenly they aren’t such big fans of the idea. 

Until we push past these issues, we are trapped in this seemingly endless, Groundhog Day-style drama where something must be done to help hopeful first-time buyers, so long as it doesn’t involve actually building more homes.

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