Since its launch in April 2021, the Mortgage Guarantee Scheme has accounted for just 1.6% of all UK residential mortgage completions.
Hailed as an essential boost for first-time buyers (FTBs), the scheme was designed to increase the availability of 95% loan-to-value products, enabling more households to access a mortgage without the need for a prohibitively large deposit.
Almost three years since its introduction, does its low take-up mean the scheme has been largely a failure?
Kerr & Watson director and co-founder Stephen Kerr certainly sees its shortcomings.
The 4.5 times annual income means you would be able to borrow less than on standard schemes
“From my perspective the scheme has faced challenges in gaining widespread adoption,” he says. “And the relatively low uptake makes me question its effectiveness.
“Looking at the average value of houses purchased through it (£201,303) versus the average house price in the UK in general (£291,000), I would suggest that the scheme is not so useful in areas where the values are higher; for instance, in London and the home counties,” adds Kerr.
Just Mortgages chapter managing director John Doughty thinks the scheme was undeniably well intentioned but agrees that its limitations have been laid bare.
“While we certainly shouldn’t discourage measures to help people purchase their own home, the low take-up of this scheme shows that it doesn’t quite hit the mark in the current climate,” he says.
Perhaps a thought would be to introduce a tiered scheme on a regional-based system, therefore with hope for FTBs in the South
“That’s not to say it isn’t helpful for some, especially for those buyers in areas where property prices fall below the national average.
“In the main, though, the scheme doesn’t quite go far enough to meet the affordability challenges facing the majority of potential buyers — especially in the areas most hit by the loss of Help to Buy, such as in and around London.”
Jane Gough Mortgages broker Jane Gough is unsurprised by the scheme’s inability to gain significant traction.
“When the scheme was launched, it placed a blanket approach on the entire UK. Because of this it’s no big surprise that there was a low uptake, because there were limitations placed on the lending criteria,” she says.
These restrictive lending criteria are something that Quilter mortgage expert Karen Noye also picks up on.
The concern over negative equity, especially for purchases at peak prices, adds another layer of caution for participants
“The scheme primarily attracts individuals and families with household income of £50,000 or less,” she says, “underlining its appeal to those aiming to step onto the property ladder without hefty financial backing. But there’s a significant hurdle: the borrowing limit, typically capped at 4.5 times one’s annual income.
“For many earning an average salary, this means they can borrow just a bit over £150,000, significantly limiting their choices in a tight housing market.”
Noye points out that, although the government’s decision — in last year’s Autumn Statement — to extend the scheme until June 2025 provides ongoing support, it doesn’t necessarily change the game for prospective homeowners.
“It’s a helpful measure, yet it stops short of addressing the broader issues of affordability and access in the housing market.”
She adds: “The concern over negative equity, especially for purchases at peak prices, adds another layer of caution for participants.”
As far as Gough is concerned, the narrow conditions of the scheme stymied its prospects from the very start.
The low take-up of this scheme shows that it doesn’t quite hit the mark in the current climate
“The 4.5 times annual income meant that you would be able to borrow less than on standard schemes. So, if you were on an average salary, there was still not much chance of getting on the housing ladder, especially if you lived in the south of the country.”
She adds: “The scheme offered nothing revolutionary or vastly different from what mortgage lenders were already offering.”
Accepting that the scheme is well intentioned with some selling points, how could it be adapted to achieve greater appeal?
Kerr thinks that raising the borrowing limit (for example, to five times income) would significantly increase the number of people wishing to use the scheme.
“There is, however, a definite risk with property values fluctuating,” he says, “especially flats where it would not take much for the 5% equity to be eroded.”
The scheme is not so useful in areas where the values are higher; for instance, in London and the home counties
With an election looming and homeownership and affordability likely to be one of the battlegrounds, what variations on the mortgage guarantee or Help to Buy theme (or any new idea, for that matter) may political parties put forward?
“In a bid to win over the ‘younger electorate’,” says Gough, “Labour are talking about a ‘new’ mortgage scheme, but what are they realistically going to offer? Yes, they could increase the borrowing amounts, but is this really the best answer?
Perhaps a thought would be to introduce a tiered scheme on a regional-based system, therefore with hope for FTBs in the South.”
Doughty argues that, if the government is serious about helping people onto the property ladder, bringing back a scheme like Help to Buy would be a great start.
“Expanding this to include second-hand homes would be a great step too,” he says. “While opinion is split on Help to Buy and its legacy, there’s no questioning its impact in generating interest and giving developers, lenders and brokers the mechanism to help clients buy a home.”
The relatively low uptake makes me question the scheme’s effectiveness
Perhaps the impetus the FTB market needs will come, in the near term, from a combination of government incentives and industry innovation. Just before we went to press, Virgin Money (teaming up with Own New) was offering reduced mortgage rates for new-build customers.
By investing homebuilder incentive budgets into the mortgage up front – typically up to 5% of the property purchase price – initial repayments are reduced for buyers.
Available only via intermediaries, it’s a product that grabs the headlines. The question once again is: will it attract the numbers and will FTBs be a specific group that benefits?
This article featured in the March 2024 edition of MS.
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