The latest news coming out of number 10 today is that, in an attempt to fix the damaged and struggling mortgage market, the government is looking into different property purchase schemes and how they are being utilised. One of these schemes on the table for discussion is the mortgage guarantee scheme. News outlets are claiming that the Chancellor of the Exchequer Kwasi Kwarteng is considering extending the scheme after a meeting with senior mortgage lending officials. But what is the mortgage guarantee scheme, and why might it be extended?
Over the years, there have been countless initiatives introduced by the ruling governments of the UK to tackle things like housing shortages, struggles with saving a deposit, and strict mortgage affordability rules. Schemes like help to buy (2013 – 2023), shared ownership, right to buy are all initiatives introduced designed to ease mortgage and housing struggles, to varying success.
What Is The Mortgage Guarantee Scheme?
Essentially, the scheme supports mortgage lenders by allowing more of them to offer higher loan to value (LTV) mortgages, so that borrowers will have to save less money for a deposit than they normally would, and therefore they should have more of a chance of purchasing a property and getting a mortgage. Most mortgage lenders judge what LTV they are willing to offer borrowers by what they consider the risk to be.
So, for example, most mortgage lenders now offer a maximum of 90% LTV with some offering more as they consider a 10% deposit and 90% mortgage lending to be a safe risk. However, for larger loans, a lot of mortgage lenders will restrict the LTV to 75, 70, or even 60% LTV because of the large amount of money being borrowed.
This is also true when people have had credit issues in the past. If your credit issues were quite severe such as defaults, missed payments, bankruptcy or IVA, lenders who are still willing to give you a mortgage may insist that you put down more deposit because the risk of lending to you has gone up due to the credit issues. Often adverse mortgage lenders will need at least a 15 or 20% deposit.
With the mortgage guarantee scheme, mortgage lenders are able to lend up to 95% with a specific product. This means that borrowers will be able to put down as little as 5% deposit themselves, and as long as they can afford to borrow the other 95% of the property as a mortgage, they will be able to purchase a property. The mortgage is guaranteed by the government giving the lender more confidence in lending to you. The guarantee compensates banks and building societies for a portion of loan in case something like a repossession happens in the future. The guarantee applies down to 80% of the purchase value of the guaranteed property covering 95% of these net losses.
Why Was It Introduced? And Why Is It In The News Again?
The mortgage guarantee has been around in different forms over the years. Almost 10 years ago launched alongside the help to buy equity loan scheme, at this time named the ‘Help to Buy Mortgage Guarantee Scheme’ where it did essentially the same thing as it does now. That scheme ended in 2016 however, during the height of the COVID-19 pandemic, the government launched a new mortgage guarantee scheme as lenders struggled to justify high LTV lending in an uncertain lending market. As pretty much everyone in the world was uncertain how things would pan out, the mortgage guarantee scheme gave mortgage lenders a bit more confidence and re-assurance.
Only ever intended as a short-term initiative to prop up the mortgage market during the pandemic, the scheme was due to come to an end in December 2022. However, due to recent economic events regarding interest rates and mortgage lending, it is said that the government are considering extending the mortgage guarantee scheme for the foreseeable future. The scheme will likely give lenders a bit more confidence in lending higher mortgages again, as it has before, but how much it will actually help the mortgage market as a whole is debateable.
What Is Happening With The Mortgage Market?
The struggle that borrowers are having at the moment is increasing interest rates and increasing mortgage affordability stress rates. Mortgage interest rates have jumped up to 6% or more with many lenders in the last couple of weeks alone. A huge increase from the 1-3% interest rates we have been used to for quite some time now. And if that wasn’t bad enough, a large number of lenders completely withdrew from the mortgage lending market last week as they all struggled to get their heads round the huge jump in rates.
Yes, a government backed mortgage guarantee may encourage more lenders back to the market, but it won’t do anything for rising interest rates unfortunately, that comes down to the Bank of England and inflation. Another struggle that borrowers are finding now is that borrowing money is now becoming more difficult as lenders tighten their purse strings in the face of an economic recession. Lenders usually impose a stress test on borrowers when they are considering lending.
This is to make sure that borrowers could afford to keep paying their mortgage if rates increased. Normally this stress test is done at around 5%. So, they test to make sure that the borrower could pay a 5% mortgage as well as their current rate if it is lower. But, as of late, several mortgage lenders have increased their stress test to 8%. That means that they are testing that borrowers could afford an 8% mortgage interest payment, even though rates aren’t currently at 8%. In many cases, borrowers are unable to afford a hypothetical 8% interest rate and are being rejected for a mortgage.
Although this stress test hasn’t been adopted by all mortgage lenders thankfully, it is troubling that lenders are that worried about rates rising and borrower’s ability to keep up with payments. Unfortunately, a mortgage guarantee scheme being extended and adopted by more lenders probably won’t make much of a change to the stress rates. As the main issue is interest rates increasing, the mortgage struggles we are facing at the moment won’t be fixed until these are under control. This comes down to a collaborative effort by the Bank of England and the Government.
Speak To A Mortgage Advisor Today
The absolute best thing you can do at the moment is to speak with a mortgage advisor. It doesn’t matter if you’ve never spoken to one before. Mortgage advice from a professional advisor is like gold dust at the moment. An advisor can help you to decide what is best for you and your mortgage to make sure you are comfortable now and comfortable in the future when mortgages are back to normal. Give our team a call today to have a chat with one of our friendly and helpful advisors.