This week the government launched the new Mortgage Guarantee Scheme which is aimed at helping first-time buyers with smaller deposits purchase their first home. Since the coronavirus pandemic began last year, the selection of high loan-to-value (LTV) mortgages available for first-time buyers was reduced to almost zero. But this week, their options have markedly improved.
The number of mortgages available for first-time buyers with smaller deposits has been gradually ticking upwards over the last month or so in anticipation of the Help the Buy mortgage guarantee launch. For mortgages backed by the new scheme, the government will guarantee 20% of the loan in return for a small fee from the lender. The lower risk to lenders meant interest rates were expected to be closer to those currently offered on 80% LTV deals.
However, the rates on these newly launched mortgages are prohibitively high, inline or higher than products not relying on the guarantee scheme. While the scheme has helped widen the availability of 95% LTV deals, giving lenders confidence to offer products they had previously withdrawn, many borrowers will still fail to meet the affordability requirements.
Our research suggests that just 50% of first-time buyers in Great Britain will meet the household income level required to service a mortgage in the scheme at an interest rate of 4.04% for a five-year fix. In London, where house prices are more expensive, that figure fell to 20%. And buyers would also need to save up a £21k deposit.
Had interest rates been set in line with 80% LTV deals or closer to pre-Covid 95% LTV rates – around 2.09% - eight of out ten first-time buyers would meet the income requirements. In practice, this means households would have needed an income of £33k a year - £10k less than those using the scheme at a higher interest rate.
All this means is that the Help to Buy mortgage guarantee scheme is less generous than the equity loan scheme which remains a more feasible option for first-time buyers. Here buyers with a 5% deposit can access a 5-year fixed rate of 2.29% providing they’re looking to buy a new home. This means 70% of new buyers would meet the household income requirement of £34k a year compared to the £43k average required for the mortgage guarantee.