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Why the first-time buyer scheme Labour says will get 80,000 young people on the housing ladder WON’T work
WE reveal why the guarantee scheme might not have the desired effect
THE government's plan to get 80,000 young people on the housing ladder with a permanent mortgage guarantee scheme may not have the desired impact, new figures have revealed.
Labour has pledged to make the previously-temporary scheme a permanent fixture as part of a package of measures to boost the housing market.
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The mortgage guarantee scheme allows lenders to provide 95% mortgages to households with the backing of the government.
This means the government guarantees some of your loan in the event you aren't able to meet your mortgage repayments, giving banks more confidence to lend you more money.
It was brought in as an emergency measure in a bid to boost the housing market following the Covid pandemic.
Labour has now promised to make the scheme permanent as part of its manifesto.
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However, new data provided exclusively to The Sun shows the scheme has hardly been utilised over the past few years and may not have the impact on the housing market the government is hoping for.
According to a freedom of information request by wealth manager Quilter, shared with The Sun, 1.13million people between the ages of 18 and 30 secured a mortgage between 2021 and 2023.
But of those, just 42,836 people bought their home with the help of the mortgage guarantee scheme, equating to just under 3.8% of transactions. Around 36,838 of those people were first-time buyers.
New figures released by HM Treasury today show 44,368 mortgages were completed through the scheme since its launch to the end of March this year, suggesting only a few thousand people used it in the first quarter of this year.
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And the number of people getting mortgages between 18 and 30 is generally reducing, Quilter's analysis of the FOI data found, falling 13% from 401,655 in 2021 to 349,449 last year.
Quilter said this is because first-time buyers are having a much tougher time getting a mortgage at all due to high house prices and mortgage rates.
Zoopla's executive director for research Richard Donnell has now said the permanent scheme may help just 5% of first-time buyers a year.
Holly Tomlinson, financial planner at Quilter, told The Sun: “The lack of take up of the current 95% mortgage guarantee scheme shows that making it permanent under Labour’s proposed ‘Freedom to Buy’ scheme will do little to help those struggling to take their first step onto the property ladder.
"Instead, the government should look to improve upon the schemes currently on offer."
Why was the scheme introduced?
The mortgage guarantee scheme was re-introduced during the pandemic in a bid to kick-start the stalled housing market.
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The guarantee works by allowing lenders to offer higher "loan-to-value" (LTV) mortgages, in this case 95%, meaning buyers only need to put down a 5% deposit.
Your LTV is the percentage of the property price you put down as a deposit versus the amount lenders provide as a mortgage.
David Hollingworth, associate director at L&C Mortgages, explained that during the pandemic, most lenders removed almost all their options for buyers with smaller deposits to minimise their risk.
"The initial inability for surveyors to visit property meant that most lenders withdrew deals available to those with higher LTVs," he explained.
"While the position improved and the market reopened, lenders were slow to return to the higher LTV market, leaving limited options for borrowers with less cash to put down, if any at all.
"The guarantee was brought back to help give lenders reassurance to offer mortgages for those with smaller deposits."
Now, Labour has said it's permanent scheme will "help working people who struggle to save for a large deposit."
Why has it been so poorly used by first-time buyers?
However, experts say a major flaw with this scheme is that the focus on allowing people to buy with small deposits doesn't address the problem of high house prices compared to wages, which is one of the biggest barriers to entry for first-time buyers.
The average property price across the UK is currently £305,000, according the Office for National Statistics (ONS), while the median annual salary was around £34,963 in 2023.
This means a single person on a median salary would need around nine times their annual wage to buy a typical home.
But most mortgage lenders will only let you borrow around five times your annual salary, which would give someone on a median wage just £174,815 - just half of a typical house price.
Someone with a 5% deposit for a typical house would only have £15,250, which would lock them out of a huge chunk of the housing market.
Charlotte Nixon, mortgage expert at Quilter, explained: "Young people’s finances are already incredibly stretched, so saving a deposit for a first home has been made all the more challenging.
"However, a high loan-to-value mortgage such as those that would be encouraged by Labour’s ‘freedom to buy’ scheme is simply not the answer.
"Such a scheme would not address the fundamental issue of high property prices relative to average incomes, which has been evidenced by the considerable lack of take up thus far."
Mr Hollingworth added that while the mortgage guarantee scheme was initially successful, over time as lenders began to reintroduce more high LTV loans on their own without needing to use the scheme.
"Although the guarantee initially worked well in encouraging a return, not all lenders chose to use the guarantee," he said.
"Lots of lenders will have brought back 95% LTV rates, but never actually relied on use of the guarantee, which will contribute to why there has been limited use of it."
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What could the government do instead?
Ms Tomlinson, of Quilter, said it would be better if the Government prioritised improving existing first-time buyer incentives, such as the Lifetime ISA (LISA).
The LISA is a savings account that lets you put away up to £4,000 every tax year and get a 25% government bonus on top.
So, if you add £4,000, you'd get £1,000 topped up for free.
This can be used to either buy your first home or to spend in retirement.
Since the LISA launched in 2017, more than 775,000 accounts have been opened, according to data from AJ Bell.
However, if you need to take any money out your account, you have to pay an "early withdrawal charge" of 25% - but this doesn't just mean paying back the government bonus.
You have to pay 25% back on the whole amount in your account, so if you paid in £4,000 and got a government bonus of £1,000, then withdraw your cash, you'd pay back 25% of £5,000 - £1,250 - meaning you'd lose an extra £250 of your own money.
Ms Tomlinson said: "The LISA's punitive early withdrawal charge should be altered so that savers only lose the government bonus, rather than a chunk of their own savings too, given the need for immediate access to savings is often for reasons beyond their control and can be because they have not fully understood this complex product," she said.
“And, raising the property cap so that the product is useful throughout the country would also be sensible, particularly in the south east where property price inflation has put a huge amount of properties over the cap.”
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A spokesperson for HM Treasury told The Sun: “This government will turn the dream of owning a home into a reality by fixing the planning system and building 1.5 million more homes, as well as helping buyers who are struggling to save with Freedom to Buy.
“This will ensure mortgages are available for those with small deposits, supporting our mission to boost economic growth across the country and make sure everyone is better off.”
Labour's plan for homeowners and renters
Labour has promised to build 1.5million homes with the aim of getting more people on the property ladder.
The government has also said new buyers will get first dibs on properties in new developments before they are sold to overseas investors.
Sarah Coles, of Hargreaves Lansdown, said: "Labour is focusing on building more affordable housing, prioritising first-time buyers, and reforming planning to speed things up."
For renters, the party promised to end the much-maligned leasehold system, where homeowners do not own the land their property is built on, and would tackle unaffordable ground rents.
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