Rachel Reeves announces permanent 95% mortgage guarantee scheme

Chancellor Rachel Reeves has announced a new, permanent mortgage guarantee scheme, helping to support homebuyers with a deposit as small as 5%.

The announcement comes on a busy day for the Treasury, which has also unveiled investment rule changes as part of the so-called Leeds Reforms, and ahead of Reeves’s Mansion House speech this evening (15 July).

Banks and building societies have previously had a backstop from the government to ensure they give low-deposit mortgages to first-time buyers. The chancellor says that scheme will be made permanent, honouring a promise made in the Labour manifesto.

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The government also said that more mortgages will be available at over 4.5 times a buyer’s income following Bank of England recommendations that some lenders offer more high loan-to-income mortgages. It claims that this will create up to 36,000 additional mortgages for first-time buyers over the first year.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, comments: “The much-anticipated replacement of the Mortgage Guarantee Scheme [...] should create a positive sentiment in the market and is designed to encourage more lenders to cater for borrowers with small deposits.

“As it stands, there are still very few deals on the market aimed at first-time buyers with just a 5% deposit, so any boost to product availability should be welcomed.”

Brian Byrnes, head of personal finance at Moneybox, says it’s “encouraging to see steps being taken to support first-time buyers”. However, he adds that the government should also focus on “meaningful, long-term support to help them start saving and investing earlier in life so they can build up that all-important deposit”.

What is Labour’s mortgage guarantee scheme?

The government’s new mortgage guarantee scheme will be available to lenders from this month (July 2025).

Eligible first-time buyers and home movers will be able to use it to buy a home with a deposit as small as 5% throughout the UK.

The Treasury says: “The government recognises the difficulties that many aspiring homeowners face in getting on the housing ladder – in particular, the challenge of raising a sufficient deposit for a home.

“The new mortgage guarantee scheme [aims] to incentivise and sustain availability of 91-95% loan-to-value mortgages by providing participating lenders with a government-backed guarantee, insuring them against a portion of their potential losses on those mortgages.”

Guarantees will be valid for up to seven years after the mortgage is originated.

Participating lenders will pay the Treasury a fee for each mortgage entered into the scheme. This will be regularly reviewed so that expected claims against the guarantee should be covered by revenue from the fee.

The new scheme replaces a mortgage guarantee scheme set up by the previous Conservative government, which closed at the end of June.

Springall comments: “Not everyone can be reliant on the ‘Bank of Mum and Dad’ to get a foot onto the property ladder, such as with a guarantor mortgage. This is why it’s so fundamental for lenders to support buyers with small deposits, to keep the market moving.

“HM Treasury has also stressed any losses incurred through the scheme would be low, and that there is a cap on the size of the government’s contingent liability of £3.2 billion.”

What else has been announced for home buyers?

The chancellor also said that more mortgages will be lent at over 4.5 times a home buyer’s income, meaning some customers will be able to borrow more.

Currently, just under 10% of new mortgages issued exceed 4.5 times a borrower's income. The Bank of England said last week in its Financial Stability Report that it was happy for that percentage to rise – although it still wants to ensure that no more than 15% of new mortgage lending across the industry is above 4.5 times loan-to-income.

The Bank’s report also warned that millions of mortgage holders are set to see their payments rise, as they roll off lower-rate deals onto more expensive ones. It calculates that homeowners face an average rise of £107 a month as their current deals end.

The increase of lending at more than 4.5 times income means that Nationwide will be able to make its “Helping Hand” mortgage – which offers lending of up to six times’ income – available to people with lower incomes.

From tomorrow (16 July), eligible first-time buyers can apply for the mortgage with a £30,000 salary, down from £35,000, and joint applicants with a £50,000 combined salary – down from £55,000. This is expected to support an additional 10,000 first-time buyers each year.

Henry Jordan, Nationwide’s director of home, says the government announcement “unlocks lending for first-time buyers at what remains a difficult time for homeownership”.

Reeves says she welcomed the changes to the loan-to-income limit on mortgage lending, and that it would have “an instant impact for consumers”.

Meanwhile, the Treasury also committed to a review of Financial Conduct Authority lending rules that could allow a prospective buyer’s record of paying rent on time to show they can afford mortgage repayments.

Problems with the mortgage guarantee scheme

The government says the permanent mortgage guarantee scheme will help those with small deposits buy a home.

But, Rob Houghton, founder and CEO of Reallymoving, a comparison site for home movers, says that is only half the problem.

“There are two main barriers to home ownership: firstly, the deposit, and secondly, affording the repayments. The problem with this scheme is it solves one but exacerbates the other, because buying with a 5% deposit leaves you with a 95% mortgage to service,” he explains.

Increasing supply is the only way to make home ownership more affordable in the long term, he adds, “and we’re yet to see any dramatic increase in housing starts”.