When announced by Rishi Sunak in the Budget meeting, the government’s new scheme is a bold move. Once again it involves direct state interference in the property market, by tinkering with the basic principle behind mortgage lending.
Usually, a mortgage lender will provide a loan on the basis that, if the borrower cannot repay it, they can repossess the home and recoup their money that way, as well as making a sufficient profit to stay in business. This model has worked well during periods of rising property prices, since a home’s resale value generally covers the outstanding loan.
However, mortgages of 90%, 95% and even 100% were common during the property boom of the early noughties, since house prices inflated around 10%, which meant lenders were always protected. Although, that soon changed during the financial crash in 2008, and now very high LTV mortgages are rare or extinct.
Lenders will be reluctant to lend high LTV mortgages in fear that house prices may crash again due to the on-going pandemic. However, the government offering to guarantee such loans is a sign that they plan to do everything in their power to keep those prices high.
Effectively, they are also betting against such a fall in the market, as propping-up the housing prices is a mixed blessing for first-time buyers. However, it is probably the best thing buyers can do is take advantage of this chance to buy a home as affordably as possible.
A mortgage guarantee scheme will help first time buyers get on the housing ladder at a time when for many owning a home seems an impossible dream. Alongside the potential extension of the stamp duty holiday that we have been calling for, this new scheme will go some way in giving hope to first time buyers at a time when the size of deposits required means they fall at the first hurdle.
Originally set to expire on the 31st March 2021, Chancellor Rishi Sunak also extended the stamp duty holiday by three months – now set to run throughout June 2021. This is to allow property transactions that are already underway to complete without falling through.
Whether the stamp duty holiday will come to an abrupt end on the 31st June, is extended again, or simply phased out gradually as Stephen Kerrigan suggests, remains to be seen. However, given that the government’s determination to keep propping up the housing market, it’s not inconceivable that stamp duty land tax may eventually be abolished altogether.