Extension to mortgage guarantee scheme only a quick fix – Perenna reacts to Autumn Statement

Following the Autumn Statement confirming the Mortgage Guarantee scheme has been extended by an additional 18 months until the end of June 2025, Arjan Verbeek, CEO at Perenna, has shared their thoughts.

Verbeek said:

“While any extension to the mortgage guarantee scheme will be welcomed by first-time buyers, it is only a quick fix. The reality is that even would-be homeowners with a 5% deposit may find themselves priced out and unable to borrow a large enough loan to get onto the housing ladder. This is, in part, due to a mortgage market dominated by short-term fixed rate products.

“This lack of choice puts all the risk on hard-pressed consumers, limiting their borrowing power at a time when house-prices remain stubbornly high. Instead, we must build the foundations of a fairer housing market increasing the availability of long-term fixes which boost affordability by letting consumers borrow up to 30% more. 

“Instead of ballot box boosting short-termism, policymakers and regulators should instead focus on creating a mortgage market that improves access to products that get more first-time buyers onto the housing ladder, better protect homeowners from fluctuating interest rates, and will see housebuilders building again.” 

Outlined below is Arjan’s four-point plan that could accelerate home ownership levels in the UK following today’s Autumn Statement;

1.  Remove the market risk from borrowers – Despite a potential extension to the mortgage guarantee scheme, the UK’s reliance on short-term fixes still places the overall risk burden on borrowers – leaving them vulnerable to interest rate fluctuations as well as the prospect of negative equity. By taking away market risk from borrowers, we can create a fairer lending environment. We would look at how this could be done through flexible long-term fixed rate mortgages, which are very popular across Europe, and in the US. The regulators should encourage this transition by increasing the period for which interest rate stress tests are applied; to a minimum of 10 years rather than five years. By doing so we can protect borrowers against shocks.
 

2.  Amend regulation on Loan-to-Income (LTIs) limits – Due to regulation, lenders can usually only provide above 4.5x LTI for c.15% of its loan book – and these loans are normally prioritised by larger lenders to borrowers who don’t need it the most. Whilst this regulation is very appropriate for short-term fixes, evidence suggests on long-term fixes people can borrow above 4.5x responsibly. This is because the risk of leverage is reduced as the cost is fixed, and the focus is primarily on affordability. According to the ONS, in 2022, full-time employees in England could expect to spend around 8.3 times their annual earnings buying a home – which makes buying a home particularly unattainable for first-time buyers with the loan to income limit. If long-term fixed rate mortgages were excluded from the LTI limit, we will see more first-time buyers onto the ladder. 

3.  Improve housing affordability drastically by removing the SVR –Whilst teaser rates are lower than a month ago, the SVR remains high, and it is the SVR that determines housing affordability. As lenders stress test borrowers at least 1% / 3% above the SVR, the borrowing amount for customers is heavily reduced. As the SVR for some lenders sit at close to 9%, borrowers are being checked to see if they can afford rates up to 12%. Were the SVR to be disallowed or capped, as it is in other countries, first time buyers will have a better chance of entering the market. 

4.  Transform the existing mortgage guarantee scheme – Were the mortgage guarantee scheme to take inspiration from similar schemes elsewhere like the one in Netherlands, the UK could see a massive boost in homeownership over the next five years. Used only on long-term fixed rate mortgages, borrowers will be protected from interest rate risk. And as the market risk is removed, the risk the government takes on through the guarantee is also reduced. With a better designed scheme, uptake by lenders will also be higher and has shown to reduce the cost of high LTV mortgages markedly.