The Labour Party has today pledged to make the current government
mortgage guarantee scheme permanent if it wins power, as part of
it's 'Freedom to Buy' scheme.
The existing scheme, due to end on 30th June
2025, allows mortgage lenders to purchase insurance against a
portion of the losses they incur in the case of borrower default.
The scheme is open to new mortgages worth between 91% and 95% of
the value of the property, provided the property purchased is a
primary residence and worth up to £600,000.
The Labour Party had previously said it would introduce a “new,
comprehensive mortgage guarantee scheme.” The aim is to make it
more attractive for commercial lenders to offer mortgages for
first-time buyers with deposits as low as 5% of the property
value, compared to the more standard 10% minimum deposit.
David Sturrock, a Senior Research Economist at the IFS
said:
“Big falls in homeownership during the 2000s mean that young
adults are now a third less likely to own their own home than
they were 25 years ago. Making the current mortgage guarantee
scheme permanent has the potential to reduce one of the barriers
to homeownership, by helping first-time buyers find a mortgage
with a deposit as small as 5%. However, the need to save up for a
deposit is only one hurdle: prospective buyers also need to have
a sufficiently high income to take out a (bigger) mortgage and
afford the repayments. As a result, potential buyers who are in
their 30s and from better-off backgrounds and who are looking to
buy outside of London and the South-East are more likely to be
able to take advantage of this scheme.”
What's been happening to home ownership?
The context for this announcement is the large decline in
homeownership rates of young adults in recent decades. Despite
partially recovery since 2015-16, homeownership for those aged
25-34 is still a third lower than it was at the turn of the
millennium. Higher house prices compared to young people's
incomes and a decline in high-loan-to-value (LTV) lending after
the financial crisis have combined to make it more difficult for
young people to accumulate the deposit required to purchase a
house.
These conditions bite harder for those looking to buy in
high-price areas and for those who cannot rely on family help
with a deposit. Previous IFS research has shown that over half of
those with university-educated homeowning parents received
financial help when buying for the first time, with receivers
getting around £35,000 on average. This compares to 29% of those
with renting parents getting help, with an average transfer of
£11,000. Partly reflecting this, 25- to 39-year-olds whose
parents were homeowners are now twice as likely to own a home
than their peers whose parents rent.
Who might benefit from this proposal?
The mortgage guarantee scheme makes it easier for lenders to
offer high loan-to-value mortgages (with lower deposit
requirements). That could reduce one important barrier to
homeownership for some young people: the deposit.
But to be able to take advantage of 95%-LTV mortgage, a potential
borrower also needs to have an income high enough to secure a
mortgage of this size and to be able to afford the repayments.
Previous IFS research has shown that reducing the deposit that
first-time buyers require from 10% to 5% of property value is
likely to have a bigger effect on affordability among potential
buyers in their 30s, those who have better-off parents, and those
who live in the North or Midlands, rather than the South.
ENDS
Notes to Editor
This response is written by Bee Boileau and David Sturrock.
To speak to the authors contact the IFS press
office press@ifs.org.uk |
07730 667013
This is part of the IFS' analysis of the 2024 General Election
and more information can be found on the IFS 2024 election website.
The authors are grateful for funding from abrdn Financial
Fairness Trust (grant 202309-GR000090) and the Nuffield
Foundation (grant GE /FR-000024370).
abrdn Financial Fairness Trust funds research, policy work and
campaigning activities to tackle financial problems and improve
living standards for people on low-to-middle incomes in the UK.
It is an independent charitable trust registered in Scotland
(SC040877). Visit www.financialfairness.org.uk.
The Nuffield Foundation is an independent charitable trust with a
mission to advance social well-being. It funds research that
informs social policy, primarily in Education, Welfare and
Justice. It also funds student programmes that provide
opportunities for young people to develop skills in quantitative
and scientific methods. The Nuffield Foundation is the founder
and co-funder of the Nuffield Council on Bioethics, the Ada
Lovelace Institute and the Nuffield Family Justice Observatory.
Visit www.nuffieldfoundation.org
