Chancellor Rishi Sunak unveiled his well-trailed £3.9bn mortgage guarantee scheme during the Budget, which he says will turn “Generation Rent into Generation Buy”.

The move to bring back 95 per cent mortgages to the market was broadly welcomed by the industry although others cautioned it would make the UK’s understocked housing market more expensive.

The scheme begins next month, with several of the UK’s largest lenders — Barclays, HSBC, Lloyds, NatWest and Santander — already signed up. However, the country’s second-biggest lender, Nationwide, is yet to back the scheme, which acts as a guarantee for lenders, not borrowers.

The move is designed to address the availability of “high-LTV lending, [which] has seen a sharp reduction throughout the Covid-19 pandemic”, says the Treasury’s 13-page outline of the plan.

The Treasury paper says applicants must pass “standard” loan-to-income and credit score tests. The government will guarantee banks up to 80 per cent of the purchase value if a property is repossessed; although “lenders will also take a 5 per cent share of net losses above this 80 per cent threshold”, adds the Treasury.

The guarantee lasts for the first seven years of the mortgage. The government will charge an as-yet-undisclosed “commercial fee” for it.

Under the similar Help to Buy scheme in 2013, the charge was 0.9 per cent for 95 per cent mortgages.

The new scheme ends in December 2022.

The government is said to be targeting the underwriting of 3,000 loans a month, which compares with 98,994 mortgage approvals in January, according to Bank of England data.

However, JLM Mortgage Services head of mortgage finance Seb Murphy regards this additional monthly figure as “conservative” given that “higher-LTV lending accounts for circa 30 per cent of all lending each month”.

Mortgage Light founder Siobhan Holbrook adds: “The property market slump that many people were expecting in April is less of a threat thanks to the government’s 95 per cent mortgage scheme, which should ensure momentum.”

However, some fear the scheme will push up prices in Britain’s understocked market.

UK house prices rose 8.5 per cent in the year to December, hitting a record £252,000, the highest annual rate since October 2014, according to the ONS House Price Index in December.

Wayhome chief executive Nigel Purves calls the new scheme “a Band-Aid on a bullet wound”.

Purves points out that a £250,000 home will command £12,500 as a 5 per cent deposit and will require first-time buyers to have “a hefty” income of more than £67,000, based on bank lending at 3.54 times salary.

Adcocks director Hedley Adcock fears higher loans could leave borrowers exposed.

The solicitor says: “If house prices drop once the government stimulus ends, there is a risk that homeowners on low-deposit mortgages will quickly fall into negative equity and owe more than their properties are worth.”

The chancellor has extended the date until which the country’s 4.7 million furloughed workers can remain at home, from April to the end of September. However, some observers fear a furlough timebomb will lead to rising unemployment whenever the jobs scheme ends.

The government’s fiscal watchdog, the Office for Budget Responsibility, forecasts unemployment will rise from its current 5 per cent, a four-year high, to peak at 6.5 per cent by the end of 2022.

Adcock says: “There are approximately five million people relying on the furlough scheme, but the concern is that there will not be the same number of jobs available when the scheme ends in September 2021.”

Habito chief financial officer Martijn van der Heijden says more lenders need to join the scheme to encourage competitive deals.

Van der Heijden says: “It was a bit disappointing to see only five big lenders involved. With Nationwide conspicuously absent, it suggests a smaller impact than it could have and limited space for innovation and competition.”

Coreco managing director Andrew Montlake adds that the end of the stamp duty holiday combined with the new mortgage guarantee will hike prices for buyers.

He says: “More people will be able to get onto the ladder but the first rung on that ladder will be a lot higher up, putting more financial pressure on buyers.”

By Roger Baird   12^th March 2021 2:15 pm