The Labour party say it will make permanent the current Mortgage Guarantee Scheme if it is voted into power at next month’s General Election to be called “Freedom to Buy.”
Introduced by then-Chancellor Rishi Sunak in 2021, the scheme broadly replaced Help to Buy in providing access to mortgages requiring lower deposits. Through the scheme the government guarantees a proportion of the value of the loan in the event the borrower defaults on payment, or a repossession sale doesn’t recoup the mortgage value. The scheme currently runs until 30 June 2025 following several extensions.
Both campaigns have been quiet on housing so far. Sir Keir Starmer is the first to break ground and announce a “Freedom to Buy” scheme which would be a permanent government guarantor for mortgages. Writing on X, Starmer says
“After 14 years of the Tories, the dream of home ownership is out of reach for too many young people. With our Freedom to Buy scheme, my Labour government would make it a reality again. My parents’ home gave them security and was a foundation for our family. As Prime Minister, I will turn the dream of owning a home into a reality.”
Criticism of the current scheme centres on the affordability of 5% deposits, with first time buyers only able to borrow 4.5 times their annual income, meaning they can secure mortgages slightly over £150k based on average salaries; which doesn’t provide much choice in a market where average house price is £288,688 according to the latest Halifax House Price Index published in the last few days, up 1.5% in 2024.
Add to that the continued growth in the proportion of income people pay on their rents, which ranges from 41% of gross earnings spent on rent in London, to 21% in Scotland according to the latest UK rental market report from Zoopla covering Q2 2024, and it’s easy to see the challenge of raising deposits.
“There are two main barriers to home ownership: firstly, the deposit, and secondly, affording the repayments. The problem with this scheme is it solves one but exacerbates the other, because buying with a 5% deposit leaves you with a 95% mortgage to service at today’s higher rates.”
says Rob Houghton, founder and CEO of reallymoving.
“In London, the average First Time Buyer purchase price is £425,000, so after putting down a 5% deposit of £21,250, monthly repayments on a 95% loan at an interest rate of 6.08% are £2,440 – assuming a 30-year term. How many First Time Buyers with limited financial resources are able to meet that monthly cost, never mind stress testing by lenders?
“Low deposit mortgages are a small part of the solution, and they will be useful to a proportion of First Time Buyers in locations such as the Midlands and the North where house prices are lower, but if Labour plan to put home ownership front and centre, they’re going to need to come up with more than this.
“We can only hope that as the parties publish their manifestos, we will finally see detailed plans to increase housing supply, including social housing, which would filter through to lower house price inflation for the rest of the market. With net migration into the UK of 670,000 in 2023, increasing supply is the only way to make home ownership more affordable in the long term.”
Over the weekend, it has been reported the Conservative party will be looking to make permanent the current first-time buyer stamp duty nil rate threshold for properties up to £425,000. The current exemption, which was introduced during the brief premiership of Liz Truss in 2022, is due to finish in March 2025.
Property portal Rightmove have called on a future government to consider reviewing mortgage affordability criteria. Mortgage lenders have responded to the Bank of England maintaining the base rate at 5.25%, with fixed rates staying above 5% year on year. Their latest stats show the average 5-year fixed mortgage rate is 5.04% against 5.11% a year ago, and the average 2-year fixed mortgage rate is 5.42%, against 5.47% a year ago
Matt Smith, Rightmove’s mortgage expert says
“There’s an opportunity to unlock greater affordability in a responsible way, which could help more first-time buyers get on the ladder. First-time buyers are already taking out longer mortgage terms and lender innovation has included the introduction of longer-term fixed rates that are likely to be part of the solution as they help by ensuring certainty of payments.”
“Various mortgage schemes have played their part and supported a number of people, and we know from our research that people would like to see new schemes introduced, but we think longer-term solutions would be more effective than short-term schemes. Either way, it’s most likely that regulatory change is needed, so it’s critical that the government works with regulators and lenders from day one on any mortgage solutions, to ensure buy in and take up, which will in turn create more options for first-time buyers.”
Sir Keir Starmer has also announced Labour would commit to an overhaul of the planning system with the ambition to build 1.5m more homes over the next five years.
2 responses
I’m not seeing any ways to reduce house prices or rent moving forward which is the crux of the problem. If the next Government is able to produce 300,000 houses a year then we might eventually see supply overtake demand but there is a long way to go for that to happen. HTB did help people get on the ladder, no question about that. However, it also vastly increased the price of houses, artificially so. This latest plan from Labour I cannot see help solve the core problems.
Each party will say they want to fix the market but they will never actually do so because there is no incentive politically.
If you increase supply, there is a commensurate drop in price given the demand in satiated by the increase. If you do that, then the highly motivated class of voting home owners will see the value of their houses go down. Being against their interests, they will always vote to constrain housing supply through planning measures etc. to ensure the prices are not affected.
The only way to do it is to tacitly reduce prices versus wages by allowing wage growth to overtake houses price growth by moderately increasing supply in the hopes that the electorate doesn’t notice the relative value of their housing assets decreasing.
Every other gimmick be it shared ownership, help to buy in all of its forms or 5% mortgages just increases competition for the insufficient amount of housing there is, driving up prices and defeating the point of the schemes.
All other solutions will need to exist outside traditional market pressures given the above outlined problem. If the money was there I would have said a significant increase in council housing but given the state of national finances, that is highly unlikely.