Extension of Freedom to Buy will help some first time buyers, but only “if they can afford a bigger mortgage”, according to the Institute for Fiscal Studies.
The Labour Party has pledged to make the current government mortgage guarantee scheme permanent if it wins the general election, as part of its “Freedom to Buy” scheme.
The existing scheme, which is due to end on June 30 2025, allows mortgage lenders to purchase insurance against a portion of the losses they incur in the case of borrower default.
In response, the IFS pointed out that the mortgage guarantee scheme makes it easier for lenders to offer high loan-to-value mortgages with lower deposit requirements.
That could, therefore, reduce one important barrier to homeownership for some young people: the deposit.
However, it cautioned that, to be able to take advantage of 95 per cent LTV mortgage, a potential borrower also needs to have an income high enough to secure a mortgage of this size and to be able to afford the repayments.
Homeownership context
The IFS response to Labour’s pledge additionally pointed out there has been a large decline in homeownership rates of young adults in recent decades.
Despite partially recovery since 2015-16, the homeownership for those aged 25-34 is still a third lower that it was at the turn of the millennium.
Higher house prices compared to young people’s incomes and a decline in high-loan-to-value lending after the financial crisis have combined to make it more difficult for young people to accumulate the deposit required to purchase a house.
The IFS also pointed out these conditions bite particularly hard for those looking to buy in high-price areas and for those who cannot rely on family to help with a deposit.
Senior research economist at the IFS, David Sturrock, said: “Big falls in homeownership during the 2000s mean that young adults are now a third less likely to own their own home than they were 25 years ago.
“Making the current mortgage guarantee scheme permanent has the potential to reduce one of the barriers to homeownership, but helping first-time buyers find a mortgage with a deposit as small as 5 per cent.”
However, he cautioned the need to save up for a deposit is only one hurdle as prospective buyers also need to have a sufficiently high income to take out a bigger mortgage and afford the repayments.
“As a result, potential buyers who are in their 30s and from better-off backgrounds and who are looking to buy outside of London and the South-East are most likely to be able to take advantage of this scheme,” he added.
tom.dunstan@ft.com
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