The government’s mortgage guarantee scheme is a wet squib

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The government’s mortgage guarantee scheme supported only a tiny proportion of the total number of first-time homebuyers in its first five months, according to recently released figures.

The program was used by 6,535 households between its launch on April 19, 2021 and September 30, Treasury figures revealed.

He saw the government ‘guarantee’ the 95% over 80% portion of a mortgage, meaning it would partially compensate the lender if a buyer defaulted.

Low participation rate: Only 6,500 first-time buyers used the mortgage guarantee scheme in its first five months, according to new figures published by the Treasury

This was intended to give banks and building societies the confidence to offer riskier mortgages, after pulling them off the market at the start of the pandemic.

When he announced the mortgage guarantee scheme in the March 2021 budget, Chancellor Rishi Sunak said it would “boost the sector, create new jobs and help people achieve their dreams of own their own home”.

However, it was thwarted by the fact that soon after the program was launched, lenders began offering 5% mortgages on their own terms, independent of the government program.

Mortgages with 5% deposits are heavily used by first-time buyers, as second stages and those higher up the ladder are usually able to use the equity in their existing homes to build up a larger deposit.

While the mortgage guarantee scheme was open to non-first time buyers, Treasury data showed that 84% of those who took advantage of it moved up the ladder for the first time.

According to the Yorkshire Building Society’s analysis of UK Finance figures, there were 408,000 first-time buyers in 2021 as a whole.

On average, this would mean 34,000 first-time buyers per month, or 170,200 in five months.

According to Treasury figures, the government scheme would have covered less than 4% of this number.

The average value of a house bought using the mortgage guarantee scheme was £197,000

The average value of a house bought using the mortgage guarantee scheme was £197,000

Although the scheme is available for homes worth up to £600,000, the total value of homes purchased in the first five months was £1.2bn, and each detached home was typically worth £196,702. £.

This is significantly lower than the latest Land Registry property price of £269,945.

The data also showed that 63% of households using the scheme had an annual income of over £40,000.

A previous set of data released on the mortgage guarantee scheme, which took into account the period between the launch of the system on April 19, 2021 and June 30, showed that 815 mortgages had been taken out.

At that time, the program had only been active for a few weeks, so many buyers using it would not have had time to complete it.

The program will be open to new applications until December 31, 2022.

Why have so few buyers used the program?

When the mortgage guarantee scheme was launched in April 2021, only a very small number of lenders offered 5% mortgages.

But soon after, many started offering them again, often outside the government curriculum.

Being part of the program involved additional costs, as lenders had to pay a commercial commission for each secured mortgage.

It is common for lenders to pass on these additional costs to borrowers, which means that mortgage guarantee scheme loan rates could have been higher.

Whether their mortgage was government guaranteed or not made no difference to buyers, so few actively sought them out, seeking the best deals instead.

Analysis by financial news service Defaqto for This is Money shows that there are currently 101 mortgages widely available to first-time buyers with 5% deposits.

Meanwhile, there are only 27 fixed-rate mortgage products that are available with government backing, and of these, only 17 are aimed at first-time buyers.

Rhys Schofield, managing director of mortgage broker Peak Mortgages and Protection, said: “It’s quite simple why the numbers are so low.

“The program was launched with a lot of bluster at the start of the pandemic and by the time it was actually operational several months later, most lenders were offering 5% offers anyway, outside of the program, without the hoops and government costs to the lender. jump through.

Make the money add up: 5% deposit mortgages are difficult for many first-time homebuyers because their incomes are too low to qualify for such a large loan.

Make the money add up: 5% deposit mortgages are difficult for many first-time homebuyers because their incomes are too low to qualify for such a large loan.

Some say first-time buyers struggle to take advantage of 5% mortgages in general because their incomes aren’t high enough to qualify for such a large loan.

Borrowers can still only borrow a maximum of 4.5 times their salary in most cases, which means low-income people and single buyers may struggle to have enough to buy a home.

For example, someone on a salary of £39,000 buying alone would typically be able to borrow £175,500.

The urge to borrow at 95% is lower among consumers than it has been in the past

Richard Donnel, Zoopla

If £175,500 was 95% of the value of their property, the most they could afford with a 5% deposit would be a house worth £184,600.

Like many 5% deposit mortgages, Mortgage Guarantee Plan loans are also generally not available to people buying new homes.

Richard Donnell, director of research at Zoopla, said: “The appetite for 95% borrowing is lower among consumers than it has been in the past.

“Mortgage regulations and stricter rules for getting a mortgage mean someone has to have a high income to take out a large mortgage relative to the value of the property.

“First-time buyers are also looking to buy larger homes, usually three-bed properties, which have a higher value and where they have to save longer for a deposit.

“Access to 95% financing is important, but it is much less of a mass market option than in the past. »

The Treasury has also published figures on the use of Isa purchase aid.

It revealed that 604,720 bonuses have been paid out through the scheme since 2015 (totalling £674m) with an average bonus value of £1,115.

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