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The government’s 95 percent mortgage guarantee scheme, which started in March, is designed to help a generation of tenants become homeowners. Will this really happen, and what are the possible implications of this scheme for the UK housing sector? Leading real estate experts are not all convinced it will deliver what it promises.
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‘The mortgage guarantee’ doesn’t mean anything to you ‘
Martin Lewis, of Money Saving Expert fame, has been one of the most outspoken skeptics since the announcement of the mortgage guarantee scheme. He takes offense at both the idea that it is good for starters and – especially – the word ‘guarantee’. It can mislead potential property owners into believing that a mortgage is somehow guaranteed by participating lenders to a first-time buyer.
Lewis said on This Morning that he suspected there was a bit of a ‘marketing hype’ woven into the name ‘guarantee’. The lenders who offer it, including big names like Barclays, HSBC, Lloyds, NatWest and Halifax, often advertise “this is a mortgage guarantee scheme!” as if that really means something to you. Let me be very clear, it doesn’t mean anything to you. ‘
Lewis is referring to the fact that the mortgages under the scheme are approved in exactly the same way as all other mortgages. The affordability criteria are the same, and many people will fail the affordability tests simply because they don’t earn enough, even if they’ve saved up a five percent down payment that would cover an average home in their area.
According to recent research from The Guardian, single buyers in their 30s on average UK wages will still not be able to afford housing in about half of the municipal areas in England and Wales. That’s even if they applied for a 95 percent mortgage.
Will the 95 percent mortgage arrangement push up house prices?
The even more alarming question is whether prices will rise further as a direct result of the arrangement. As Sara Williams writes in her Blame Camel blog, ‘there were no measures in the budget to increase the supply of housing in general or of’ affordable housing ‘. So more people will compete with each other to buy the same number of houses … Therefore it is likely that house prices will rise. ‘
What this will mean in practice is that people who try to buy even in two or three years will be looking at even greater deposit requirements, larger and longer mortgages, and a greater chance of negative equity over the longer term. As Williams points out, “ House price increases benefit people who already own real estate and especially the elderly who don’t need to move to larger homes. They don’t help starters at all! ‘
Both Lewis and Williams also stress that if a new buyer can reach as much as 10 percent at all, they definitely should. A 95 percent mortgage can help get some people up the property ladder, but it will always have worse interest rates than mortgages with a lower LTV (loan-to-value ratio).