The Chancellor, Rishi Sunak's, announcement of the extension of the Stamp Duty Land Tax (SDLT) holiday wasn’t the only significant initiative targeting the property market in today's Budget. In support of UK Prime Minister, Boris Johnson's, ambition to “turn generation rent into generation buy” a revamped Mortgage Guarantee Scheme was heralded.
Commencing in April 2021, the scheme is largely modelled on the Help to Buy scheme launched in 2013. The scheme aims to encourage home ownership for those with deposits as low as 5%. The backdrop to the introduction of this initiative is the collapse in high Loan to Value (LTV) mortgages over the past year. In February 2021 there were only five 95% LTV mortgage products available compared to 4051 just 12 months earlier.
The government's view is that the contraction in high LTV products is a reaction to tightening credit conditions associated with the pandemic rather than structural in nature. For this reason, the scheme is scheduled to end on 31 December 2022 although it will be reviewed before that date to determine whether there is a requirement for it to continue.
Under the provisions of the scheme, participating lending authorities are able to purchase a government guarantee on the portion of the mortgage between 80% and 95%. In the event of a borrower getting into financial difficulty and their property being repossessed the government will largely compensate the mortgage lender for that portion of their losses. Mortgage eligibility criteria includes:
The government has also specified that all participating lenders will be required to offer a five-year fixed-rate product as part of its guaranteed range of mortgages. This is designed to provide borrowers with certainty in their repayment schedule in the short term.
In announcing this initiative, the Chancellor confirmed that several major high street banks are poised to begin participating from mid-April including Lloyds, NatWest, Santander, Barclays and HSBC. The government will be hoping that it is as successful as the earlier scheme which increased the number of high LTV products from 43 in October 2013 to 261 in June 2017.2
Notwithstanding the Prime Minister's targeting of millennials who are struggling to save the deposit for their first home, the scheme takes a deliberately broad-brush approach. So, it is open to all creditworthy buyers not just first-home buyers and its scope extends to established homes as well as new-build properties.
One of the creditworthy metrics relates to loan-to-income requirements. UK lending institutions cap this at 4.5 times income for the calculation of a mortgage. They will also perform an affordability assessment based upon an applicant's personal and living expenses. Due to these credit constraints, it is more likely that the Mortgage Guarantee Scheme will be of greater assistance to applicants outside of London and other expensive districts.
Allied with the extension to the SDLT holiday, the indications are that the UK residential property market will experience robust activity and strong growth in the first two-three quarters of 2021 at least. Of course, the fragmented London market will continue to experience variable results.