The danger of propping up negative equity situations is real, but some see value down the road
As house prices remain on a downward trajectory, the government’s decision to extend the Mortgage Guarantee Scheme, which enables people to buy a property valued up to £600,000 with only a 5% deposit, is meeting with mixed reviews.
One view is that the extension encourages first-time buyers to obtain high loan-to-value (LTV) mortgages in a falling market, raising concerns of low-deposit buyers falling into negativity equity.
Graham Cox (pictured), director at Self Employed Mortgage Hub, said extending the Mortgage Guarantee Scheme risks encouraging first-time buyers to seek 95% LTV mortgages in a declining market.
“House prices could easily drop 20% over the next year to 18 months, so all this will do is increase borrower's chances of getting into negative equity and potentially being repossessed,” Cox said.
Cox believes the best thing the government can do for first-time buyers and to support the economy is let house prices fall so they become more affordable.
In Cox’s view, extending the Mortgage Guarantee Scheme will have the opposite effect to this.
End of Help To Buy program spurs private replacements
Gaurav Shukla, director at Home Me, said that although the extension may be perceived as a good thing, he believes the government is not doing enough to help first-time buyers.
“The lending limits remain in place from the lenders so many people are still struggling to buy with a 5% deposit, especially when most lenders cap lending to 4.5x income at this LTV,” he said.
The government's Help To Buy scheme has ended, and Shukla said this was a real boost for many people in accessing their first homes, he believes something very similar to this will need to be thought of, quickly.
Shukla said he has seen new private lenders stepping up to the plate to help borrowers access mortgage products with a 5% deposit now that the Help to Buy scheme has reached its conclusion.
Positive views
Amit Patel, adviser at Trinity Finance, believes the extension is a much-needed policy announcement that will enable buyers with a smaller deposit to get onto the housing ladder in a turbulent market.
“It would have been naive to withdraw the scheme, given the dip in housing activity and the prevailing sentiment that house prices will drop in 2023/2024,” he said.
Justin Moy, managing director at EHF Mortgages, said the decision to extend the scheme is a welcome one. The extension will enable lenders to continue to offer mortgages to those with smaller deposits, he said, with the additional risk covered by the government rather than the lender itself.
“To cover the predicted bump in property values and the subdued market, it would be prudent for lenders to offer these 95% LTV mortgages on longer fixed terms – say three to five years – as that will hopefully cover any negative equity issues, so that when the mortgage is ready for renewal, there is equity in the property,” Moy said.
He believes this would also help with checking a borrower’s ability to carry the loan, adding that even with a 95% LTV mortgage commitment, this will still be a cheaper option than renting in many parts of the UK.
A boost to confidence
Gary Boakes, director at Verve Financial, said that any support for first-time buyers is a good thing at the moment.
“With several lenders recently pulling two-year fixed rate products at 95% LTV and affordability and criteria being restricted, the higher LTV market was starting to look restricted,” he said.
Boakes added that he is hopeful the announcement of the extension will improve confidence among lenders.
What are your views on the extension of the Mortgage Guarantee Scheme? Let us know in the comments below.
