The mortgage guarantee scheme has gained traction notching up over 37,000 sales since its launch just over two years ago, but high interest rates and the prospect of falling house prices put these homes at risk of falling into negative equity, says investment firm Quilter. 

The mortgage guarantee scheme has registered 37,376 mortgage completions, representing nearly 1% of all UK home mortgage sales since the programme began in April 2021.  

Of these sales, 86% went to first-time buyers, according to Treasury data released this morning, adding that the total value of home loans supported by the scheme is £7bn.  

The plan sees the government offer lenders the option to purchase a guarantee on mortgage loans where the borrower has a deposit of less than 10%.  

In the first quarter of this year, there were 1,938 sales under the measure adding up to £417m in mortgages.  

The mean value of homes bought or remortgaged through the scheme was £197, 472, compared to the UK average house price of £285,009.  

However, Quilter mortgage expert Karen Noye points out that high interest rates may lead house prices to fall by up to 10%, leaving homes bought under the plans at risk of the outstanding balance of their mortgages being higher than the market value of the property.

The Bank of England raised interest rates by 50 basis points to 5% last month as in bids to battle inflation, currently at 8.7%.      

Financial markets are betting that the BoE bank rate will hit 6.5% next March, while JP Morgan forecasts the rate could touch 7% next year.    

Noye says: “This morning’s mortgage guarantee scheme statistics show that there continues to be significant numbers of people taking out high loan-to-value mortgage products despite a potential downturn in the market on the horizon.  

“With the housing market showing signs of an impending slowdown, with some predictions showing a potential 10% drop is on the cards, there could be severe repercussions for those who have utilised the scheme.”  

She adds: “The potential fallout of negative equity can be quite significant. For homeowners, it can mean being trapped in a property, unable to move or remortgage until the housing market recovers.”  

Meanwhile, Help to Buy equity loan and ISA completions are beginning to wane as they near their end and the various scheme price caps coupled with still high house prices and rising interest rates hit transactions, according to Treasury and Department for Levelling Up data. 

Noye says: “Use of the government’s Help to Buy ISA has dwindled significantly in the last year.”  

Help to Buy ISA has supported 558,176 property completions since its launch in 2015, but only 66,689 of those were completed in 2022, with just 11,040 completed in the first quarter of 2023. The plan, which offers a 25% government bonus to FTBs, closed to new applicants in November 2019.  

But Noye points out: “This bonus is only available if used on properties costing £250,000 or under, or £450,000 in London.   

“Given the dramatic rise in house prices in recent years, coupled with the fact that they have not yet fallen in the way many had expected, FTBs will have been left with far fewer options.   

“Despite the average house price now sitting at £285,009 and the average FTB house price reaching £236,682, the mean value of a Help to Buy purchase price remains at just £177,372.”  

The Help to Buy equity loan scheme closed to new applications in October 2022, with the deadline for completions extended to the end of May this year.  

Noye says: “Between January to March 2023, just 3,202 properties were purchased with an equity loan, a 41% drop compared to the same period a year prior.  

“The current cost-of-living pressures are having a real impact on the property market and the frustrations of prospective FTBs are still widely felt.   

“High house prices and rising interest rates mean taking a first step onto the property ladder has been pushed out of reach for many, and we can expect this to continue to reduce the completion rate of these schemes.”