Permanent Mortgage Guarantee Scheme would not move the dial for FTBs

07 June 2024

The Labour party’s proposed initiative has been effective in grabbing headlines, but would be unlikely to be effective in helping First-Time Buyers onto the property ladder.

London 07/06/2024
Kate Davies, Executive Director of IMLA, comments:

“Labour proposes to make the Mortgage Guarantee Scheme (MGS), introduced by the Conservatives in 2021 and due to end next June, into a permanent fixture, with the aim of encouraging more lenders to offer 95% loan-to-value mortgages.

“But a shortage of 95% loan-to-value mortgages is not the issue in today’s market – there are more than 300 products available at this level right now. When the MGS was introduced during the pandemic, mortgage funding was restricted and many lenders withdrew from the riskier (and more high-maintenance – so more time-consuming) end of the lending scale in response to economic uncertainty. The scheme did boost the number of 95% loans on offer at the time, but mainly from the bigger lenders, under some pressure from the government. It is not a great scheme from the lenders’ perspective, as it is expensive for them to use, and exclusive – signatories to the MGS are not permitted to combine these with 95% loans backed by their own, cheaper, private insurance schemes.

“Now there are plenty of 95% mortgages offered by a range of large and small lenders, funded without the government’s expensive scheme. But FTBs still need to meet affordability requirements to secure these loans. And the higher loan-to-value space is further restricted by the arbitrary ‘flow limit’ imposed by the Bank of England on mortgage providers who lend more than £100m a year. This limit prevents them from lending more than 15% of their homeloans at more than 4.5 times the borrower’s income.

“IMLA commissioned a report on the issue which showed that 54% of prospective FTBs across the UK needed a mortgage at or above the 4.5 x limit, while in London the figure was nearer 80%. Lending more than 4.5 times income is not irresponsible – applicants still need to go through the affordability assessments every lender makes to qualify for these mortgages, and be deemed capable of making the repayments. But once a lender gets close to the 15% ceiling they need to jam on the brakes and stop lending at that level – because to exceed it would incur penalties imposed by the regulators.

“Reviewing and increasing the LTI flow limit would be a far more effective way of increasing the availability of higher loan-to-value mortgages to FTBs than perpetuating the Mortgage Guarantee Scheme. We’d happily talk to Labour’s – and other parties’¬ – policy makers to explain this issue to them in more depth. It’s in all our interests to improve the position for first-time buyers.”