Sir Keir Starmer’s promise to extend the mortgage guarantee will only benefit high earners, a think tank has said.
The Labour Party said that it would make the current first-time buyer scheme, which insures banks against borrower defaults, permanent, as part of its “Freedom To Buy” plans.
Sir Keir said he wanted to “turn the dream of owning a home into a reality” and help 80,000 younger buyers on to the property ladder in the next Parliament.
The mortgage guarantee scheme has been used by around 40,000 buyers since it was introduced in 2021 by then-chancellor Rishi Sunak. In December, Chancellor Jeremy Hunt extended it until June next year.
But a report published by the Institute for Fiscal Affairs (IFS) on Friday warned that Labour’s policy might not help all first-time buyers, as prospective homeowners would need to have high incomes in order to borrow 95pc of the property’s value.
The report said: “To be able to take advantage of 95pc Loan-to-Value (LTV) mortgage, a potential borrower also needs to have an income high enough to secure a mortgage of this size and to be able to afford the repayments.”
Reducing the deposit that first-time buyers need is more likely to have a bigger impact on affordability amongst those in their thirties, those who have better-off parents, and those who live in the North or the Midlands, the analysis added.
Some 40pc of those aged between 15 and 34 – 6.7 million people – were living with their parents in 2022, according to the Office of National Statistics (ONS).
Rob Houghton, founder of property comparison website ReallyMoving, said: “There are two main barriers to home ownership: firstly, the deposit, and secondly, affording the repayments.
“The problem with this scheme is it solves one but exacerbates the other, because buying with a 5pc deposit leaves you with a 95pc mortgage to service at today’s higher rates.”
Mr Houghton added: “In London, the average first-time buyer purchase price is £425,000, so after putting down a 5pc deposit of £21,250, monthly repayments on a 95c loan at an interest rate of 6.08pc are £2,440 – assuming a 30-year term.”
Stephen Perkins, of broker Yellow Brick Mortgages said that the policy lacked “real substance”.
He added: “The Mortgage Guarantee scheme has become almost obsolete with standard 5pc deposit mortgages available, and even 1pc deposit options on other schemes from lenders.”
In January, Chancellor Jeremy Hunt was warned against so-called “99pc mortgages” which see buyers needing just a 1pc deposit, with the Royal Institute of Chartered Surveyors (Rics) saying that it would push up house prices.
Other critics warned that without tackling the roots of the housing crisis the policy would fail to support younger buyers. Labour has committed to planning reform in order to build 1.5 million homes.
Jeremy Leaf, former chairman of the Royal Institute of Chartered Surveyors said: “Sadly we have heard similar announcements from both main political parties in the past where the end result doesn’t match the rhetoric. In our view, there is little point in coming to the aid of first-time buyers unless there is sufficient choice of properties for them.”
The Labour Party was contacted for comment.
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