Why the Government’s 95% Mortgage Guarantee Scheme doesn’t work for single first-time buyers

The Government is considering extending the mortgage guarantee scheme ‘to support a new generation in realising the dream of home ownership.’

The scheme insures lenders against some of the risk of handing out mortgages with 5 per cent deposits. 

The Government claims this will enable more aspiring homeowners to buy – though some in the mortgage industry claim it has outlived its original purpose. 

However, new analysis shows the majority of single first-time buyers on the average salary can’t afford to use the scheme.

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Single first-time buyers on the average salary cannot afford to use the government’s 95% mortgage guarantee scheme on three quarters of properties in typical first-time buyer market

The research by Rightmove used the latest earnings data from the Office for National Statistics. It revealed that single first-time buyers on an average salary and using a 5 per cent deposit could not afford three-quarters of properties for sale in the typical first-time buyer market.

Homes in this typical first-time buyer market include studio flats and one and two-bedroom flats and houses – smaller properties that are a popular first step to getting on the housing ladder.

The most recent figures show that the mortgage guarantee scheme has supported only a tiny proportion of first-time buyers in their attempts to get on the property ladder.

The scheme was used on 37,376 home purchases between its launch in April 2021 and March 2023, according to Treasury statistics.

This amounts to around 1,550 purchases per month, or 1 per cent of the total in that time period.

Why is the Mortgage Guarantee scheme unhelpful?

All mortgage lenders limit borrowers to a maximum loan-to-income ratio. This is a cap on the amount banks will lend based on the borrower’s annual income. They are able to offer some loans above this level, but there are tight restrictions on how many.

As a general rule of thumb most first-time buyers will find themselves limited to a maximum of 4.5 times their annual income.

This means that for someone on the average national full-time salary of £34,793, the maximum they could realistically borrow is £156,569.

If the person was able to muster up a 5 per cent deposit, they would therefore be looking at a maximum budget of £164,810 to buy their home. 

According to Rightmove’s analysis this means single first-time buyers cannot afford to use the Government’s 95 per cent mortgage guarantee scheme on three quarters of studios, one and two-bedroom properties across the UK.

Priced out: For someone on an average national salary of £34,793 who has a 5% deposit, the maximum they could realistically borrow is £164,810

Matt Smith, a mortgage expert at Rightmove says: ‘Any focus and support for those with the smallest deposits is always going to be welcome.

‘However, in reality the mortgage guarantee scheme is only able to help a very small portion of movers, with the majority of first time buyers preferring to get the affordability benefits of saving for a bigger deposit .

‘If the scheme was cancelled then it may be seen as a disappointing outcome by some, but in reality it’s unlikely to have a significant impact on consumer choice, as many lenders are offering 5 per cent deposit deals outside of the Government scheme.’

There are of course huge discrepancies by region. In London, a single first-time buyer on an average London salary could afford only 2 per cent of homes using the 5 per cent deposit guarantee scheme, compared to 67 per cent of properties for those in the North East.

Options to use the scheme greatly open up for those buying with a partner, friend or family member, with 70 per cent of first-time buyer properties in the UK within the affordability limit of the average two-person income.

Tim Bannister, a property expert at Rightmove adds: ‘Having enough affordable homes in the right places has been an ongoing challenge.

‘It’s clear from our analysis that people trying to buy on their own on the average salary are likely to be priced out of the majority of homes without significant financial help from elsewhere.’

Those opting for 95 per cent mortgages available through the scheme may also be missing out on better alternatives, according to Mark Harris, chief executive of mortgage broker SPF Private Clients.

He says: ‘Other 95 per cent products outside of the scheme may be cheaper and are worth taking a look at, for example those offered by Santander – which exited the Mortgage Guarantee Scheme.

‘Some lenders outside the scheme may have alternatives offering enhanced criteria for high loan-to-values for first-time buyers, such as Nationwide’s Helping Hand.’

That scheme allows first-time buyers who meet certain criteria to borrow more than 4.5 times their income.  

Harris continued: ‘Some lenders in the mortgage guarantee scheme, such as Halifax and NatWest, do not allow joint borrower, sole proprietor to boost affordability or allow it to be used in conjunction with the mortgage guarantee scheme, such as Barclays.

‘Having additional names or salaries attached to the mortgage would be less risky should something happen to the single applicant’s source of income, although it may not be practical to buy with someone else.’ 

Joint borrower, sole proprietor mortgages are when not all parties to the mortgage are legal owners of the property. 

For example, first-time buyers might add a parent on to the mortgage to add an additional salary and boost how much they can borrow, without them ever actually living there. 

Why is the Mortgage Guarantee Scheme risky?

There are also concerns over whether buying a home with such a small deposit is wise at a time when house prices may fall.

House prices defied expectations by rising 0.9 per cent last month, according to the latest Nationwide house price index.

However, house prices remain at 5.23 per cent (£14,328) below their peak in August 2022, before mortgage rates began to surge.

Earlier this week, official data from HMRC showed the number of homes sold in September was 17 per cent down on the same time last year.

Downturn: House prices remain 5.23 per cent (£14,328) below their peak in August 2022, before mortgage rates began to surge

Bank of England data has revealed mortgage borrowing for house purchases continued to fall in September, with activity down by more than a third compared with the same period in 2022.

Zoopla also revealed that the house price downturn had spread across Britain, with 80 per cent of local areas registering annual falls.

While, earlier this month, the latest survey by the Royal Institution of Chartered Surveyors (Rics) showed that estate agents are overwhelmingly seeing prices fall.

Amid this backdrop, there are fears that anyone opting for a mortgage to cover 95 per cent of the property’s value could be at serious risk of falling into negative equity in the future.

The equity is the value of a property that someone owns outright. So negative equity is when a home becomes worth less than the remaining value of the mortgage. 

If that happens, the owner may be left unable to remortgage, and in some cases be forced to sell their home and lose their hard-earned deposit in the process. 

Beware: To be in negative equity, the value of your house must fall below the amount you still owe on your mortgage

However, the reality is that most people should be able to cope as long as they continue making repayments and wait for equity to build and their house price to recover.

This requires a long-term approach and may require the homeowner to hold off moving house. 

Although they won’t be able to remortgage to another lender whilst in negative equity, they should be able to refinance with their current lender. 

Mark Harris of SPF Private Clients adds: ‘Anyone borrowing at 95 per cent loan-to-value needs to be aware of the potential of negative equity, where your home is worth less than the mortgage secured on it. 

‘There is a risk of taking on a high LTV in an environment where house prices are falling. 

‘However, over time prices tend to recover and negative equity is only an issue if you have to sell or remortgage to another lender. 

‘In such a scenario you may have to pay back the difference between the sale price and the outstanding mortgage to the lender, or in the latter scenario take a product transfer with your existing mortgage provider.’