Rachel Reeves is expected to launch Labour’s Freedom to Buy scheme tomorrow, a permanent replacement for the Mortgage Guarantee Scheme (MGS)  aimed at supporting 95% loan-to-value (LTV) mortgages and improving access to homeownership.

The scheme is designed to help buyers with smaller deposits by offering lenders a government-backed guarantee. By making it permanent, ministers hope to provide lenders with greater confidence to offer high-LTV products even during periods of economic uncertainty.

However, industry reaction has been mixed, with questions raised about the initiative’s likely impact on affordability, homeownership rates and supply.

Figures released in December 2023 show the MGS, launched in 2021 and set to expire in June 2025, facilitated just over 53,000 completions – 86% of which were first-time buyers.

BELOW NATIONAL AVERAGE

The average purchase price under the scheme was £211,616, well below the national average of £268,000 at the time, suggesting that take-up was concentrated in lower-priced areas such as the North West and Scotland. Participation was far lower in higher-cost regions like London and Northern Ireland.

Freedom to Buy is expected to mirror the MGS in structure, with lenders paying a fee in return for the government guarantee, which covers a portion of any losses in the event of repossession.

The Bank of England has agreed to raise the cap on high loan-to-income lending from 10% to 15% of new approvals, potentially supporting up to 36,000 additional high-LTV loans per year.

LIMITED HELP

But critics warn the scheme could be of limited help in more expensive markets unless paired with further support for deposit savings or affordability. There is also concern that encouraging more high-LTV borrowing could increase the risk of negative equity in a volatile housing market.

Despite its intentions, some argue the scheme may be more political than practical. Earlier this year, the number of 95% LTV deals available on the open market hit a five-year high, with nearly 400 options not reliant on government support – raising doubts over the necessity of a taxpayer-backed initiative.

NOT TOO MUCH TO GET EXCITED ABOUT

HomeOwners Alliance chief executive Paula Higgins said first-time buyers are unlikely to notice any difference, given that the scheme operates behind the scenes between lenders and government.

She added: There’s not too much to get excited about here.

“The Mortgage Guarantee Scheme was originally launched to encourage lenders to offer 95% mortgages but lenders no longer need that nudge. Earlier this year, the number of 95% LTV mortgage deals hit nearly 400, the highest level in almost five years.

“This feels more like a political gesture than a practical solution to the housing crisis.”

If the government really wants to support first-time buyers, it should turn its attention to fixing the Lifetime ISA.

“Right now, anyone forced to withdraw their savings early faces an unfair penalty — losing 6.25% of their own money. And the £450,000 property price cap hasn’t moved since LISAs launched in 2017, despite soaring house prices, particularly in the South East. Reforming LISAs would make a real, practical difference to those trying to get on the ladder.”

LTTLE REAL IMPACT

Jeremy Leaf, a former RICS residential chairman, said that unless affordability improves in high-cost areas, Freedom to Buy may have little real impact. He also warned that without significant progress on housing supply, the scheme could inflate property prices further.

“It is understood that under ‘Freedom to Buy’ fees will be paid by lenders to offset taxpayer risk. The Bank of England agreed to sanction a rise in the present just under 10% of new mortgages which exceed 4.5 times a borrower’s income to no more than 15%, which could result in up to 36,000 new higher LTV mortgages a year.

“Freedom to Buy will only push up prices and make it more expensive.”

“The Government have talked a good game as far as improving housing supply is concerned but until clear change is apparent on the ground, Freedom to Buy will only push up prices and make it more expensive not only for existing but future first-time buyers.”

And he added:  “The new arrangement is unlikely to make a difference unless more help can be given to buyers especially those with a 4.5 times loan-to-income ratio wishing to raise deposits – rather than increasing availability of mortgages.

“In our offices, the ending of the stamp duty concession in March clearly showed how much of a deterrent finding those upfront costs are to first purchasers in particular.

“More assistance in that regard is essential to significantly improve activity not just in the housing market but job and social mobility generally, bearing in mind its hugely positive impact on wider economic growth.”