Government extends mortgage guarantee scheme to help first-time buyers

The government is extending its mortgage guarantee scheme, which helps those with small deposits buy their first home, until December 2023.

The extension comes as analysts are predicting a slump in house prices next year due to higher mortgage rates, the rising cost of living and an impending recession.

The mortgage guarantee scheme was launched in April 2021 and was due to end this month. According to the Treasury, it has helped over 24,000 buyers get onto the property ladder.

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The scheme helps people with 5% deposits by providing lenders with the financial guarantees they need to provide mortgages that cover the other 95% of the price of a house worth up to £600,000. “Extending this scheme means thousands more have the chance to benefit and support the market as we navigate through these difficult times,” said John Glen, chief secretary to the Treasury.

Why is the mortgage guarantee scheme being extended?

Lenders tend to pull high loan-to-value (LTV) products from the market in turbulent times. The scheme was launched in the middle of the pandemic when the property market’s outlook seemed uncertain – in January 2021 there were just eight 95% LTV products available.

Many house price indices indicate the property market is cooling down following two years of rapid growth. Halifax expects house prices to fall 8% next year due to higher interest rates.

Rightmove’s house price index revealed a 2.1% dip in asking prices, their biggest drop in four years. The Office for Budget Responsibility is also predicting prices will fall 9% over the next two years.

This is due to a combination of things. The cost of borrowing has increased alongside interest rates, which the Bank of England has raised to 3.5% to control inflation.

A year ago mortgage rates were about 2%. In the aftermath of the mini-budget, they rose to a peak of 6.65%. They have since fallen to 5.99% and 5.78% for two-year and five-year fixed rates, but remain significantly higher and could be making buyers delay their plans as they wait for more favourable conditions.

On top of that, the cost of living is rising, driven by higher food and energy prices. That looks unlikely to ease soon – energy prices are due to go up by 20% in April as changes to the Energy Price Guarantee come into effect.

The government also introduced an extension to stamp duty cuts, but only until 2025. While the two schemes might help boost the market, it does seem like prices are headed back to their pre-pandemic levels.