21 August 2024
New Freedom of Information (FOI) data from the FCA gathered and analysed by Quilter, the wealth manager and financial adviser, reveals Labour’s plan to introduce a ‘Freedom to Buy’ mortgage guarantee scheme is unlikely to achieve the desired impact in supporting prospective first time buyers.
Further new data out today, shows that since its launch in April 2021, just 44,368 mortgages have been completed with the support of the current mortgage guarantee scheme - 86% of which, or 38,323 were first time buyers. Comparatively, Quilter’s analysis of the new FOI data reveals that between 2021-2023, more than 1.13 million mortgages were secured by 18-30 year olds.
Quilter’s analysis reveals the number of people between the ages of 18 and 30 securing a mortgage each year has risen relatively steadily in the last decade, reaching 350,092 in 2023 compared to 252,558 in 2014. However, this number has been trending downwards since a spike of 401,665 in 2021 which aligned with the stamp duty holiday introduced during the pandemic, resulting in a 13% fall in just two years.
Given mortgage rates and house prices are now much higher than a decade ago, which has piled pressure on affordability, prospective first time buyers are having a much tougher time securing a mortgage. It is therefore imperative that any schemes introduced by the new Labour government are effective.
The Labour government has announced new housing targets and planning reform but given the length of time it will take for any impact to materialise, it may need to look to other options to support first time buyers in the meantime. In its manifesto, Labour pledged to introduce a ‘Freedom to Buy’ mortgage guarantee scheme, which would see the current mortgage guarantee scheme introduced by the Conservative party made permanent. Though well meaning, the current scheme has had very little impact, meaning its permanence would provide inadequate support to its intended beneficiaries.
Many support schemes have been offered to first time buyers in recent years, with some proving more effective than others. Many of the schemes are now closed or have time restrictions for when first time buyers must use them in order to fully benefit. Below, Quilter has assessed the impact of three key schemes which the Labour government could consider reinstating, adjusting, or taking inspiration from.
Help to Buy ISA: Since its launch on 1 December 2015, the Help to Buy ISA has supported 592,105 property completions. Though those with these accounts can continue to use them for their first property purchase, they have until November 2029 to save into them and must have claimed the 25% government bonus by November 2030, putting pressure on those currently saving to buy a home to do so in order to make the most of their savings.
Help to Buy equity loan scheme: In its 10 years of existence, the Help to Buy equity loan scheme supported a total of 387,195 property purchases. However, this scheme closed to new applications on 31 October 2022, with the scheme officially coming to an end on 31 March 2023, so prospective first time buyers are no longer able to make use of it. What’s more, the scheme's impact was not uniformly positive. Its design allowed the government to gain a share of the property's appreciation, meaning as house prices increased, so did the government's profit from these loans. This aspect became particularly burdensome for homeowners when they reached the end of their five-year interest-free loan period. With the interest rate initially set at 1.75% and then increasing annually based on inflation, many homeowners faced escalating costs, adding financial strain to what was initially intended as an assistance program.
Lifetime ISA: The Lifetime ISA was introduced in April 2017 and offers a 25% government bonus on savings of up to £4,000 per tax year. Since inception, the Lifetime ISA has been used for 171,050 house purchases. The LISA comes with punitive early withdrawal charges which could put off those looking to save.
Charlotte Nixon, mortgage expert at Quilter, said: “While it is certainly a good thing that more young people have been able secure a mortgage over the past decade, it appears the number may now be falling. This will in part be down to the lack of support on offer for first time buyers, which has only been exacerbated by high mortgage rates, the pace of house price growth and the difficulty faced in saving a deposit.
“Given the current economic circumstances, young people’s finances are already incredibly stretched, so saving a deposit for a first home has been made all the more challenging. However, a high loan to value mortgage such as those that would be encouraged by Labour’s ‘Freedom to Buy’ scheme is simply not the answer. Such a scheme would not address the fundamental issue of high property prices relative to average incomes, which has been evidenced by the considerable lack of take up thus far.
“Not only have very few people made use of the scheme currently on offer, but with house prices still at risk of fluctuating, those that do could be at risk of negative equity. Having such a low deposit amount would leave people with little to no wiggle room in terms of house price changes before falling into what can be an extremely difficult situation to get back out of.
“In the first instance, it will be imperative that Labour follows through on its commitment to increase housing supply, but even so this is unlikely to be enough to help those at the bottom of the chain. The dawn of a new government provides the perfect opportunity to reassess the options currently available, as well as to invest time into consulting and planning to ensure that any new schemes brought to the table are as effective as possible.”
