Getting onto the property ladder may feel like a pipe dream to many young people, with house prices and mortgage rates skyrocketing in recent years. It’s also difficult to save for a deposit with living costs increasing and high inflation, but the Mortgage Guarantee Scheme could be a game changer in 2025.
Originally introduced in 2021, the goal was to help buyers by encouraging lenders to offer 95% loan-to-value (LTV) mortgages, and Labour has announced plans to extend the scheme, which could be great news for prospective homeowners.
This article will explore how the scheme works, how it might benefit you, and some of the risks it might bring for first-time buyers.
How Does The Mortgage Guarantee Scheme Work?
The scheme provides mortgage providers with a government-backed guarantee designed to reduce the financial risk if a borrower defaults on their mortgage.
To qualify, lenders are encouraged to offer 95% loan-to-value mortgages, so buyers only need a 5% deposit.
The scheme is mostly aimed at first-time buyers who may struggle to afford a traditional mortgage due to the immense cost of deposits.
What is the Importance of Labour’s Extension?
The Mortgage Guarantee Scheme has helped thousands of people so far, but some argue that it doesn’t address broader affordability issues in the housing market.
Labour has a job on its hands overcoming various hurdles, but they haven’t outlined any adjustments to eligibility criteria, lender participation, or a new timeline for rollout.
However, the original scheme was time-limited and due to expire, and Labour’s extension likely means a longer-term commitment for buyers, potentially going beyond 2025. Buyers will hope that there are some additional measures to ensure affordability and prevent risky mortgage lending, but that remains to be seen.
How The Extension Could Help First-Time Buyers
Here’s a quick rundown of how the Mortgage Guarantee Scheme could help first-time buyers in the UK.
More 95% LTV mortgages
Lenders are hesitant to offer these due to risk, but government guarantees could mean that more 5% house deposit options are available.
Lower interest rates
The government guarantee could mean that lenders reduce interest rates on these mortgages, removing a key barrier to securing a mortgage for first-time buyers.
However, rates will likely remain high compared to traditional mortgages, even if they’re low for LTV mortgages.
More confidence
By encouraging banks to offer low-deposit mortgages, the housing market could see a boost, and first-time buyers might have more confidence to buy a property.
Potential Challenges
Of course, there are risks associated with the extension of the scheme, such as:
- Higher monthly repayments due to the larger loan required for a 95% LTV mortgage.
- Risk of negative equality from house prices falling and owners in homes worth less than their outstanding mortgage.
- Affordability issues could still arise, with underlying issues like high property prices compared to wages not addressed.
Conclusion
While the Mortgage Guarantee Scheme is seen as a positive step forward by Labour, there are still risks and challenges to be addressed for the scheme to be a success.
However, the extension shows Labour’s willingness to tackle at least some issues of the housing market, so there’s reason to be optimistic if you’re looking to get onto the property ladder for the first time.
At Cedar House Financial, we have decades of experience helping people secure their first mortgage and can do the same for you. With options available for people who have struggled to get a mortgage in the past, contact our team on 020 8366 4400 or email enquiries@cedarhfs.co.uk to find out more.