The New Mortgage Guarantee: Good Idea, Or Big Mistake:
Most of our blogs lately have centred around the fallout of Rishi Sunak’s Budget. However, there is one area that we have not yet covered – namely, what the Budget has meant for the millions of would-be first time buyers currently stuck in no man’s land. For them, the Chancellor’s speech was clear. ‘Generation Rent,’ he said, ‘will become Generation Buy.’ But, what does this mean, how will it be applied, and most pressingly, will the new mortgage guarantee be a good idea in the long run?
What Was Announced?
Rishi Sunak declared two measures to boost the housing market. Firstly, he announced that the extension of the stamp duty holiday by three months until June 30th. Tapered relief would then apply until September 30th.
More eye-catching, though, was his announcement of the new mortgage guarantee. Good news for many, this will see some of the country’s largest lenders offering Government-backed 95% mortgages from next month. It was a policy that the Chancellor insisted would give people without a huge deposit, the chance to buy their own home.
As you might expect, the mortgage industry rejoiced at the news. Historically, first-time buyers make up a large part of the housing market. But, all too often, they don’t have the kinds of large deposit required to get a foot on the ladder. Inevitably, Lockdown made life even more difficult with high loan-to-value mortgages in very short supply.
So, on the face of it, the scheme sounds good. It will help first-time buyers while (hopefully!) stimulate the housing market. In turn, this should be good for the economy as companies cash in on people spending money on DIY and home improvements.
Under the scheme, lenders will also offer long-term fixed-rate mortgages. So, first-time buyers will know what their mortgage payments will be for at least five years and have the benefit of being able to budget and plan accordingly.
The Not So Good
On the flip side of the coin, some commentators are dubious about the new mortgage guarantee. Those with long enough memories will remember other mortgage market schemes designed to stimulate lending in the past. Self-certified mortgages immediately spring to mind as an example of what sounded good initially only to pan out rather differently.
There are also concerns about yet another ‘Government guarantee.’ The ‘Bounce Back’ loan scheme has already seen over £43bn lent to businesses with The Financial Times since dubbing it a ‘giant bonfire of taxpayers’ money.’
So, naturally, there are worries that this new mortgage guarantee could end up costing the taxpayer even more money? By definition, 95% lending is risky – but then drastic times call for drastic measures!
There is also the age old problem of house price inflation to consider. Will a sudden rush of first-time buyers, armed with a Government guarantee, push up prices for everybody? ‘Yes’ seems the likely answer – but with the inheritance tax rate frozen for five years in the Budget, rising house prices would also mean a windfall for the Chancellor.
Written by Alex Welsh
Alex is a Resolution-accredited, Chartered financial adviser. Having joined the firm in 2012, he has extensive knowledge of all areas of financial planning.