New plan aimed at helping first-time buyers get cheaper mortgages revealed – how it works

In the UK, according to official government figures, only a quarter of average earners aged 25-34 own their own home, compared with two-thirds in 1995

First-time buyers could be offered cheaper mortgages if they take out an insurance policy, as part of new plans to get people with small deposits up the housing ladder faster.

The insurance policy would protect the banks in the event of default and therefore allow them to offer lower mortgage rates to the buyer.

Michael Gove, the housing secretary, is examining Canadian-style plans to make credit more available to those without large savings.

He expressed concern that restrictive mortgage financing is preventing a generation from owning a home.

Gove said he will “fix our dysfunctional housing market” by looking at how other countries have allowed more families to get loans with small deposits.

Banks lend less to people with small deposits because they are considered risky and at greater risk of default.

Gove said that “we need to make it easier for young people to access finance,” noting that only a quarter of the average 25-34 year old owns their own home, down from two-thirds in 1995.

“Getting more young people up the housing ladder depends first on improving their ability to get mortgages. Many people who currently rent their homes pay their landlord more each month than they would have to pay to service a mortgage on the same property,” he wrote in the Mail on Sunday.

“We are looking closely at what else can be done now to help,” Gove said, adding, “Other countries facing similar problems are making mortgage finance easier to access and we can do the same.”

Buyers in Canada who borrow more than 80 percent of their home’s value are required to purchase mortgage guarantee insurance.

This is offered by their state-owned Canada Mortgage Housing Corporation and two private providers.

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Government-backed mortgages mean banks don’t have to ask for large deposits and monthly costs go down.

In Canada, monthly payments for a 95 percent mortgage loan to value mortgage are 32 percent higher than for a 75 percent mortgage loan, compared to 52 percent higher in the UK, according to a study by the Tony Blair Institute.

Ian Mulheirn, chief economist at the Tony Blair Institute, said banks’ requirement for larger deposits than in the past is “the number one obstacle to homeownership” and has pushed up mortgage costs for first-time buyers, so interest rates are percentage point or point two higher than for those with larger deposits.

“Theoretically, if you have reliable compulsory insurance, that should eliminate most of that difference,” Mulheirn said.

Mulheirn said the obligation to duty has resulted in cheaper interest rates because it “prevents the product from being used only by risky lenders or lenders at risky moments in the economic cycle, both of which drive up fees.”