Mortgage Guarantee And Phased SDLT For Homebuyers

The chancellor claimed on Wednesday a phased end to the stamp duty holiday and a government guarantee for 95pc mortgages will turn ‘generation rent’ into ‘generation buy’.

News of the stamp duty holiday extension is without doubt what the housing market had been anticipating. The move will enable record levels of property currently under offer to complete without the urgency of the March 31 deadline and result in much needed stock coming onto the market.

Sunak had responded to calls from the industry for a tapered extension to the stamp duty holiday to prevent buyers facing unexpected bills. He said in England and Northern Ireland the threshold for the tax to kick in would remain at £500,000 until 30 June. After that, it will be reduced to £250,000 until 30 September, then revert to its original level of £125,000.

The phased change will mean buyers who miss the June deadline will not face as large a tax bill as they would if the tax returned to normal in one cliff-edge move.

But there will still be an incentive for those buying expensive homes to complete their purchase promptly. Someone paying £500,000 for a property will see the bill increase from £0 to £12,500 if they complete after June but before the end of September. So the threshold of £250,000 from July to September will reduce the maximum saving from £15,000 to £2,500.

Five-year fixed-rate mortgage to be offered

In his budget speech, Sunak said although first-time buyers had previously benefited from not having to pay stamp duty on property costing up to £300,000, raising a deposit still presented a ‘significant barrier’.

With this in mind, he said the Government would offer a guarantee to lenders to encourage them to offer 95pc mortgages again, with the scheme running from April until the end of 2022.

Estate agent Hamptons said lowering the threshold to £250,000 from July to September would still mean more than 50pc of buyers in England will pay no stamp duty, compared with 94pc now and 16pc from October.

The scheme will apply to homes costing up to £600,000 and will not be restricted to first-time buyers or people who move from one home to another. Lenders will be obliged to offer a five-year fixed-rate mortgage as part of the scheme, to give borrowers the opportunity to opt for stable monthly payments.

The guarantee is similar to the first Help to Buy: Mortgage Guarantee, which supported 105,000 transactions from October 2013 to June 2017, with around 28,000 transactions per year. This figure is little more than half (53pc) of the 53,000 sales supported by the Help to Buy Equity Loan scheme at its peak in the year to September 2019.

Take-up of guarantee likely to be linked to affordability

Yet as borrowing at high loan-to-value (LTV) ratios is expensive, the mortgage terms will be key to the scheme’s success. In January 2021, the average quoted mortgage rate for a 95pc LTV mortgage was 4.07pc, according to the Bank of England. A mortgage at 75pc LTV costs less than half that, at 1.75pc.

Even if the guarantee helps reduce high LTV mortgage rates, these loans would still be much more expensive than 75pc mortgages.

But raising a deposit is not the only obstacle first-time buyers face. There are also limits to how much they can borrow relative to their income. Lenders can advance no more than 15pc of their loan book to those borrowing more than 4.5 times their income.

The minimum income required for a 95pc LTV mortgage on the average FTB home in England, costing £274,000, is £57,844, an income enjoyed by a mere 25pc of households.

This suggests take-up of the mortgage guarantee will be greatest in areas where house prices are relatively low and loan-to-income ratios lower. Conversely, take-up will be limited in areas where affordability is already low.

For instance, take-up for the first Help to Buy: Mortgage Guarantee scheme was highest in Leeds, with 1,404 transactions, and Birmingham, with 1,385. On the other hand, less affordable areas such as Camden, Cambridge and Christchurch saw fewer than 50 transactions each as loan-to-income caps prevented buyers from taking advantage of the scheme.

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