In the Budget, the Chancellor announced the introduction of a new mortgage guarantee scheme. The scheme will limit loan losses for banks that have issued mortgages with a loan-to-value ratio (LTV) between 91 and 95%. For example, in the case of default, a mortgage with a LTV ratio of 95% would mean that the first 5% of the reduction in the house value is born by the buyer, the next 15% by the government and the remaining 80% by the bank.1 This, so the government hopes, will incentivise banks to introduce the type of high LTV mortgages that disappeared during the pandemic. The scheme will be available to all individuals buying properties with a value of up to £600,000. Any bank participating in the scheme must, however, pay a fee for securing the protection under the mortgage guarantee scheme and the government claims that the fee will ensure that the scheme is self-financing.2
Some commentators have already discussed the effectiveness of this policy which is trumpeted as turning "Generation Rent" into "Generation Buy". The following points are hard to disagree with:
- The new policy will barely help Generation Rent as lower deposit mortgages require a higher income relative to the purchase price of the property (banks lend usually up to 4.5 times the income) and the costs of less than 10% deposit mortgages are also substantial with interest rates around 4% and more, and with long repayment periods.
- House prices are likely to increase further in already unaffordable areas due to the policy. This point has been documented in the case of the earlier "Help to Buy" policy,3 which is conceptually similar to the new policy.
- Moreover, most first-time buyers choose mortgages with between 80 to 90% LTV. They will not benefit from the new scheme but will be hit by any resulting house price increase, and possibly by the incentive for banks to offer in particular higher LTV mortgages.
In some respects, the new policy seems to be a continuation of past (and still operational) housing policies (such as the "Right to Buy" and "Help to Buy" schemes) but two aspects of the new mortgage guarantee scheme are worth highlighting.
First, the new scheme is both substantially less generous and riskier for buyers. The "Right to Buy" scheme - introduced in 1980 - allowed social housing tenants to buy their property with discounts averaging 50%. Under "Help to Buy" (the equity loan) scheme - introduced in 2013 - the government "buys" indirectly (via the buyer) 20% of the house for 25 years (40% in London).4 This comes at no cost for the buyers in the first 5 years and from year 6 on, a fee of less than 2% of the initial equity contributed by the government is charged. The new policy is much less generous, reflecting the government’s requirement that the new scheme should be self-financing.
Further, while under the "Help to Buy" scheme, the risk to the borrower of volatile house prices and interest rates is reduced due to the indirectly held equity stake by the government that comes at little cost, buyers under the new scheme bear a larger part of this volatility risk. Most borrowers choose mortgages with fixed interest rates for the first 2 to 5 years and re-finance after the initial period. Since it is unclear whether the mortgage guarantee scheme will be in place after the initial fixed interest period, this means – if house prices have not increased sufficiently – that borrowers may be unable to re-finance and that are therefore exposed to high and varying interest rates.
Second, the new scheme does little to increase the housing supply. The "Right to Buy" scheme allows councils to build new houses with the proceeds of "Right to Buy" sales, and the "Help to Buy" scheme is available only to buyers purchasing new houses. But the new policy has abandoned both of these features. It might be argued that this is reasonable as research has shown that the "Help to Buy" scheme stimulates housing supply only in already affordable areas.5 However, since the new scheme complements "Help to Buy" but is less generous, it will have little impact on housing supply, if at all. The question is thus, why is the government proposing another policy that will most likely only increase house prices?
The most obvious answer is that all three of the policies discussed here support homeowners. All were introduced under Conservative governments, and homeowners are almost twice as likely to vote Conservative.6 As a result of the "Right to Buy" scheme, the share of UK home-ownership increased from 55% in 1980 to almost 70% in 2010. The "Help to Buy" scheme did not increase this any further but instead serves to increase house prices (in already unaffordable areas). The new policy will have a similar effect, presumably improving the lot of potential Conservative voters. This is consistent with the temporary stamp duty holiday: that holiday reduced the absolute tax burden most for owner-occupiers aiming to step up the property ladder. It also helped buy-to-let investors and second home buyers, but it did very little for first-time buyers who already faced no stamp duty on the first £300,000 value of their property.
Thus, the government policies in this area seem less targeted at improving the position of Generation Rent and more concerned with implementing policies that keep house prices rising to the next General Election: an early launching of the Government’s re-election campaign.
1 Banks bear 5% of a reduction in house prices between 5 to 20%, see HM Treasury (2021): The mortgage guarantee scheme: Outline.
2 So the scheme is like insurance, which banks can buy to cover high LTV mortgage default losses in case of a housing crisis; the fee will be set such that the revenue collected by the government is equal to the expected payments to banks.
3 Felipe Carozzi, Christian Hilber and Xiaolun Yu (2020): On the economic impact of mortgage credit expansion policies: Evidence from help to buy. CEPR Discussion Paper No 1681.
4 The "Help to Buy" scheme has many dimensions, the most important ones are the equity loan and shared ownership, which is conceptually similar to the equity loan, as the government buys directly a share of the property. Help to Buy also included from 2013 to 2017 a "Mortgage Guarantee", which similarly to the new policy, allowed buyers to buy houses with 5% deposit mortgages with the government acting as a guarantor for the mortgage.
5 Felipe Carozzi, Christian Hilber and Xiaolun Yu (2020): On the economic impact of mortgage credit expansion policies: Evidence from help to buy. CEPR Discussion Paper No 1681.