The Chancellor’s Mortgage Guarantee: a Good Idea? Or a Big Mistake?

07 April 2021

Generation Rent,” declared Rishi Sunak in his Budget speech, “will become Generation Buy.”

Had the House of Commons been full, this announcement would no doubt have been greeted with loud cheers by Conservative backbenchers. At last, someone is doing something to help young people get on the housing ladder…

So what did the Chancellor announce? And is it a good idea? Or is he simply repeating the mistakes we have seen so many times in the mortgage market – meaning that, in the long run, we’ll all pay the price? 

Rishi Sunak declared two boosts to the housing market in the Budget. First of all he extended the stamp duty holiday by three months to June 30th, with tapered relief then applying until September 30th. 

More eye-catching, though, was his introduction of a mortgage guarantee, with some of the country’s largest lenders offering Government-backed 95% mortgages from next month. “A policy,” said the Chancellor, “that gives people who can’t afford a big deposit the chance to buy their own home.” 

The mortgage industry generally welcomed the move: first-time buyers historically make up a large part of the housing market, very often don’t have a large deposit and have struggled over the last year with high loan-to-value mortgages in very short supply. 

So on the face of it the Chancellor’s scheme is a win/win. It will help first-time buyers and it will stimulate the housing market – which should be good for the economy as people spend money on home improvements and DIY projects. Lenders under the scheme will also offer long-term fixed- rate mortgages – meaning that the first-time buyers will know what their mortgage payments will be for at least five years and can budget and plan accordingly. 

Some commentators, though, have been rather more cautious about the scheme. Those with long experience of the mortgage market will remember other schemes to stimulate lending – self-certified mortgages, for example – which seemed like a good idea at the time, and later turned out to be rather less so…

There are also doubts about yet another ‘Government guarantee.’ More than £43bn has been lent to businesses through the ‘Bounce Back’ loan scheme. The Financial Times has since dubbed it a ‘giant bonfire of taxpayers’ money’ and suggested that more than half the money lent could be lost. 

Could the Chancellor’s mortgage guarantee end up costing the taxpayer more money? By definition 95% lending is risky – and the Chancellor wouldn’t be the first in his position to misjudge the mortgage market. 

The other problem, of course, is house price inflation. Will a sudden rush of first-time buyers, armed with a Government guarantee, push up prices for everybody? ‘Yes’ seems the likely answer – but with the inheritance tax rate frozen for five years in the Budget, rising house prices would also mean a windfall for the Chancellor.