Labour’s ‘Freedom to Buy’ mortgage scheme defined – how wouldn’t it have an effect on you?
Labour has announced plans to help get more people onto the property ladder under a new scheme unveiled yesterday.
Labour’s new “Freedom to Buy Scheme” is a permanent version of the Government’s current Mortgage Guarantee scheme which was first introduced in 2021 and is set to expire at the end of June next year. The measure sees the government act as a guarantor for part of a home loan – to encourage lenders to offer low-deposit deals.
The existing scheme allows lenders to purchase a guarantee on part of mortgages, so the Government could shoulder some of the cost if the lender loses money. For example, if the borrower fails to keep up with mortgage payments and the property is repossessed, but the subsequent property sale does not cover the outstanding mortgage amount.
The Government said the scheme allows lenders to increase its high loan-to-value lending – so borrowers can buy with a smaller deposit of 5% – rather than the traditional 10%. Labour said making the scheme permanent would help more than 80,000 young people get on to the housing ladder over the next five years.
Labour has not confirmed exactly how the Freedom To Buy scheme would be different from the current one in place – other than it being permanent. Under the Tories’ scheme, you must be buying a main residential home in the UK, it must be worth £600,000 or less, and the property cannot be a new build. You also must apply for a repayment mortgage – meaning you can’t get an interest only – and you’ll need to pass a lender’s normal affordability criteria to be granted it.
So far, there are six banks offer loans under the scheme – although some lenders do offer 95% mortgages not under the scheme – and they include:
- Lloyds
- Halifax
- Bank of Scotland
- Natwest
- Santander
- Barclays
- HSBC
- Virgin Money
Labour has not confirmed whether lenders have to opt in, or whether all lenders will be required to offer these types of mortgages. It’s also important to realise that there is no difference between a 95% mortgage offered through this scheme and a 95% mortgage offered outside this scheme. The only difference is for the Bank.
The scheme mainly aids people who can afford monthly mortgage payments, but are unable to save large sums while renting. This is because borrowers do need to pass affordability checks before being granted a mortgage. So, they would prove they could make the monthly mortgage payments, and not just be able to raise the deposit. These mortgage deals tend to be much more expensive – so those who earn a higher income often benefit from them. The deals tend to become cheaper the bigger your deposit.
If the rules remain the same, then many first time buyers in typically expensive housing areas will not be able to access the scheme. For example, basic properties in London – such as two-bedroom terraced houses – can potentially be priced at between £800,00 and £1million – meaning they are not able to take advantage of this scheme.
One of the biggest issues facing first-time buyers at the moment is raising the funds for a deposit. This is because house prices have skyrocketed over the last decade which has caused the deposit price to also rise. According to mortgage lender Halifax, new house price data showed that the average house price in the UK was £288,688 in May 2024. This means for a 10% deposit, you would need to raise £28,800, and for a 5% deposit, you would need at least £14,400.
