MortgagesOct 7 2022

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

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Govt mortgage scheme ‘won’t solve looming refinance problem’
[Simon Dawson/Bloomberg]

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.

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. 

You’ve got monetary policy pulling in one direction, and fiscal policy pulling in the other. Something has got to snap, and that’s the housing market.Hiten Ganatra, Visionary Finance

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.

Managing director of Visionary Finance, Hiten Ganatra, told FTAdviser the chancellor can only hope the war in Ukraine eases, which would bring down the cost of oil and fuel and in turn ease pressure on interest rates.

“How much can the government underwrite in order to save people’s mortgage payments? It just can’t be done.”

Ganatra said the government needs to focus on structural aspects such as shortage of stock if they are going to do anything.

They need to get the builders round to create affordable homes.Imran Hussain, Harmony Financial Services

“You can’t borrow upwards for £50bn to give tax cuts when that liquidity will create inflationary costs. You’ve got monetary policy pulling in one direction, and fiscal policy pulling in the other direction. Something has got to snap, and that’s the housing market.”

Mortgage sales head at London Mortgage Partners, David Gissing, said “most of the damage has been done”.

He added: “It’s hard to repair now unless we can get the economy back on track and rates to affordable levels for home buyers, as it’s certainly squeezing and discouraging people from the property market at present.”

Gissing said quite a few lenders have already moved away from the government’s mortgage guarantee scheme, although with the current uncertainty it would encourage lenders to keep or reintroduce their 95 per cent product offering. 

Govt scheme poses risk of negative equity

Some big lenders, such as Virgin Money, currently have no 95 per cent deals. But many others still do.

“The guarantee scheme is neither here nor there,” said Harmony Financial Services director, Imran Hussain.

“It makes no difference if lenders still have these products. The issue is if prices dip, clients who have a guarantee scheme could end up in negative equity,” he explained.

Credit Suisse analysts have said the UK house prices could dip as much as 15 per cent in the near future.

Hussain said none of his clients used the mortgage guarantee scheme the first time around. 

“What the government needs to do is get a grip on inflation and not do crazy things where people lose confidence in the pound,” said Hussai.

“There’s not a lot the government can do with schemes, as these just prop up prices and don’t help first-time buyers.”

Hussain said he wants to see more social housing being built, encouraging people to move out of private rentals which would then free up stock.

“They need to get the builders round to create affordable homes,” he said.

A government spokesperson said while the UK has seen disruption, global financial markets have also seen significant volatility in recent weeks. 

"A range of factors are affecting mortgage and interest rates, which have been rising internationally in response to global trends including Putin’s illegal invasion of Ukraine," they said.

“We are doing what we can to support people with rising costs – our Energy Price Guarantee will save the typical household around £1,000 a year and we are providing payments of £1,200 to the eight million most vulnerable families."

The spokesperson added that the government is committed to "strong fiscal discipline and to debt falling as a percentage of GDP over the medium term".

"Further details will be set out in a medium term fiscal plan on November 23, alongside a forecast by the independent OBR [Office for Budget Responsibility].”

ruby.hinchliffe@ft.com