Labour has unveiled a new initiative aimed at increasing homeownership, dubbed the “Freedom to Buy Scheme.” This program is set to be a lasting fixture, unlike the temporary Mortgage Guarantee scheme introduced in 2021, which is due to expire by mid-next year.
The government’s role in this scheme is to partially back home loans, thus motivating financial institutions to present deals requiring lower deposits.
Under the current arrangement, financial institutions can secure a government-backed guarantee for a portion of the mortgage, providing a safety net for the government to absorb some losses if, for instance, a borrower defaults and the sale of the repossessed property doesn’t cover the mortgage balance.
The scheme is designed to boost lenders’ confidence in offering high loan-to-value mortgages, enabling buyers to secure homes with just a 5% deposit instead of the standard 10%. Labour projects that this permanent scheme could assist over 80,000 young individuals in becoming homeowners within the next five years.
Details on how Labour’s “Freedom to Buy Scheme” will differ from the existing one are yet to be clarified, with the exception of its permanence. The current scheme has specific criteria: the property must be your primary residence in the UK, valued at £600,000 or less, not newly built, and you must opt for a repayment mortgage, not interest-only, meeting the lender’s standard affordability checks.
It remains uncertain whether participation for lenders will be optional or mandatory. It’s crucial to note that the terms of a 95% mortgage under this scheme are identical to those offered independently, with the distinction only affecting the lending institution.
The scheme primarily benefits those who can manage monthly mortgage payments but struggle to save for a substantial deposit while renting. Applicants must pass affordability assessments to ensure they can handle the mortgage payments beyond just affording the initial deposit. Typically, these mortgage deals are pricier, favouring higher-income earners, and become more affordable with larger deposits.
Should the regulations stay unchanged, many first-time buyers in high-cost areas like London, where even modest homes can range from £800,000 to £1 million, may find themselves ineligible for the scheme.
A significant hurdle for prospective homeowners is the steep rise in property prices over the past decade, inflating the required deposit amounts. As of May 2024, Halifax reported the average UK house price at £288,688, meaning a 10% deposit would be £28,800, while a 5% deposit would require at least £14,400.
