"The return of the Mortgage Guarantee Scheme is a positive signal for buyers struggling with deposits, but it’s unlikely to be a game-changer"
- Rob Owens - e.surv
Chancellor Rachel Reeves has unveiled the Government’s new Freedom to Buy scheme during her Mansion House speech today, marking the return of mortgage guarantees aimed at easing access to 95% loan-to-value (LTV) loans for first-time buyers and home movers.
Replacing the temporary pandemic-era programme, the revised scheme is intended to become a permanent feature of the mortgage market. It allows buyers to secure a property with just a 5% deposit, with the Treasury guaranteeing part of the lender's risk in the event of repossession. Participating lenders will pay a fee to offset potential losses, while the government’s financial exposure is capped at £3.2bn.
City minister Emma Reynolds emphasised the long-term nature of the plan, saying it would provide greater certainty across economic cycles. In tandem, the Bank of England has eased mortgage regulations by loosening its loan-to-income cap, which is expected to increase high-LTI lending, particularly for borrowers under 40.
The previous version of the scheme, active from 2021 to 2023, supported 53,261 mortgage completions, equating to around 1.4% of residential lending. Despite its limited scale, the updated plan aims to help buyers unable to save the necessary deposit, with nearly 80% reportedly in that category. However, analysts caution that it won’t address the broader issue of overall affordability.
Industry has mixed reactions
“There’s not too much to get excited about here,” said Paula Higgins, chief executive of the HomeOwners Alliance. “The Mortgage Guarantee Scheme was originally launched to encourage lenders to offer 95% mortgages but lenders no longer need that nudge. Earlier this year, the number of 95% LTV mortgage deals hit nearly 400, the highest level in almost five years.”
“Since the scheme operates entirely behind the scenes between lenders and government, we don’t expect first-time buyers will notice any difference. This feels more like a political gesture than a practical solution to the housing crisis.”
Higgins added, “If the government really wants to support first-time buyers, it should turn its attention to fixing the Lifetime ISA. Right now, anyone forced to withdraw their savings early faces an unfair penalty, losing 6.25% of their own money. And the £450,000 property price cap hasn’t moved since LISAs launched in 2017, despite soaring house prices, particularly in the South East. Reforming LISAs would make a real, practical difference to those trying to get on the ladder.”
Rob Houghton, founder and CEO of Reallymoving, explained, “There are two main barriers to home ownership: firstly, the deposit, and secondly, affording the repayments. The problem with this scheme is it solves one but exacerbates the other, because buying with a 5% deposit leaves you with a 95% mortgage to service.”
He continued, “Increasing supply is the only way to make home ownership more affordable, and we’re yet to see any dramatic increase in housing starts.”
Rob Owens, head of research at e.surv, noted, “The return of the Mortgage Guarantee Scheme is a positive signal for buyers struggling with deposits, but it’s unlikely to be a game-changer. While it helps reduce risk for lenders and opens the door to higher LTV lending, the previous scheme, launched in April 2021, made up a small share of lending, less than 2% of completions over its duration.”
“With mortgage rates falling and affordability rules easing, more buyers may now be able to take advantage of the scheme. While recent government policy has focused heavily on boosting housebuilding, demand-side support to ease affordability pressures has been in short supply. This scheme offers some help, but without broader action to make homeownership more accessible, its impact may remain limited.”
Rachel Springall, finance expert at Moneyfactscompare.co.uk, commented, “The much-anticipated replacement of the Mortgage Guarantee Scheme is part of the Government’s plan to boost first-time buyers and will be a permanent policy to improve UK growth. Its creation should create a positive sentiment in the market and is designed to encourage more lenders to cater for borrowers with small deposits. As it stands, there are still very few deals on the market aimed at first-time buyers with just a 5% deposit, so any boost to product availability should be welcomed.”
“First-time buyers are the lifeblood of the mortgage market, and they have been facing an excruciating situation to afford a mortgage, amid a short supply of affordable housing. Not everyone can be reliant on the ‘Bank of Mum and Dad’ to get a foot onto the property ladder, such as with a guarantor mortgage. This is why it’s so fundamental for lenders to support buyers with small deposits, to keep the market moving. HM Treasury has also stressed any losses incurred through the scheme would be low, and that there is a cap on the size of the Government’s contingent liability of £3.2 billion.”
“This scheme, along with lenders relaxing stress tests and the ongoing considerations about loan-to-income rules, is a great combination for first-time buyers struggling to afford a mortgage. However, those borrowing at the higher ends of the loan-to-value spectrum will have little equity in their homes as a result, and disaster could strike if house prices were to plummet. Therefore, seeking advice before entering any arrangement is vital, especially to ensure a deal is picked based on a competitive rate, fees and incentives.”
Peter Stimson, director of mortgages at lender MPowered Mortgages, commented, “Kudos to the Chancellor for delivering on an election pledge. The rebranded Mortgage Guarantee Scheme is a good idea. The trouble is it’s a year too late, and is missing one vital detail - the cost.
“The mortgage market has changed a lot since Rachel Reeves swept into 11 Downing Street last July.
“The Base Rate has come down by a full percentage point and hundreds of 95% LTV mortgage products are now available.
“Every lender who wanted to offer a 95% loan is probably already doing so. The Chancellor’s announcement is unlikely to make dozens more suddenly follow suit - as the price of entry is unknown and will vary each year.
“The Freedom to Buy scheme shuffles some of the risk burden between lenders and the Government, but don’t expect it to make mortgages cheaper for borrowers.
“Much like the Mortgage Guarantee Scheme it replaces, the capital offered to mortgage lenders is likely to be at market rate rather than discounted.
“So while first-time buyers who aren’t able to call on the Bank of Mum and Dad may find it slightly easier to get a mortgage with a 5% deposit, they will still pay some of the highest interest rates.
“For all the Chancellor’s fanfare, big questions remain over the cost of Freedom to Buy and it will tweak, rather than transform, lending to first-time buyers. She would have done better to bring back an updated version of the Help to Buy scheme to boost both housebuilding and access to finance."
“Would-be buyers need more homes to be built, rather than tinkering with a product that the market is already providing on its own.”
