Govt mortgage scheme ‘won’t solve looming refinance problem’

Govt mortgage scheme ‘won’t solve looming refinance problem’

Brokers have said an extension to the mortgage guarantee scheme is “neither here nor there” and does nothing to address the issue of those already with a mortgage who will soon have to move from 1 to 5 per cent interest rates.

Yesterday (October 6), Chancellor Kwasi Kwarteng met with bank bosses from HSBC, Lloyds, Barclays and NatWest in response to steep interest rate rises following his "mini" Budget announcement last month.

According to the Financial Times, the Treasury indicated it would consider an extension to the mortgage guarantee scheme.

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It allows buyers in England to secure a mortgage with a 5 per cent deposit. The Treasury then guarantees a portion of the loans on homes worth up to £600,000.

The scheme was brought in following the pandemic, after a mass exodus of lenders from the 95 per cent loan-to-value market as banks tried to safeguard their balance sheets against excessive risk.

It was, however, branded a “damp squib” by brokers. In the first three months of the scheme, just 812 of these mortgages worth £185mn were completed. 

Between July, August and September, the scheme’s reach grew. But it still only accounted for 1.3 per cent of the £78.9bn in mortgage commitments made in the third quarter of 2021.

At the time, many specialist lenders had already re-introduced their own 95 per cent deals separate to the government scheme.

Brokers have said the government’s limited capacity to underwrite such guaranteed loans means it will not have the “reach” needed to help the number of those set to face unaffordable repayments.

Around 1.3mn people are set to come out of fixed rates next year, many of whom will have secured a rate of around 1 per cent.

Yesterday (October 6), the average rate on a five-year fixed mortgage breached 6 per cent for the first time since February 2010, according to Moneyfacts.

Associate director at Private Finance, Simon Marsh, said the scheme - aimed at first-time buyers - “doesn’t really have any effect on monthly consumer [mortgage] payments”.

“It helps banks guarantee loans on their books, but it doesn’t help consumers,” he said.

Banks take out an insurance policy to be part of the guarantee scheme. While this indemnity payment on the loan does drive up the cost of funds, it is designed to take away some of the risk.

“It’s a nice headline for the government to say they are extending their help. But it doesn’t address the looming problem, which is refinance.

“Lots of clients are coming off mortgages, having started at 1 per cent and who will be going up to 5 per cent or more.”

Marsh said the government could do something similar to the energy price guarantee and limit rate increases, but he admitted that would probably be too tricky to do for mortgages.

‘Damage already done’

Many brokers told FTAdviser there was no clear government solution to the current environment. One broker, who asked not to be named, said the government should have “done its homework” before introducing a mini "Budget" which destabilised the entire mortgage market. Now, they said there is little hope of a return to normality.