The government is extending the mortgage guarantee scheme, which helps buyers with small deposits get on the property ladder as higher borrowing costs threaten to put the brakes on the UK housing market in 2023.

The scheme, launched in April 2021, was billed as a way of helping turn generation rent into “generation buy”. It had been due to finish this month but the government said it would now run until the end of next year. The Treasury said the scheme had helped more than 24,000 households across the UK, with first-time buyers behind 85% of the transactions.

The initiative supports banks and building societies that offer 95% loans, meaning buyers only have to raise 5% themselves, on a house worth up to £600,000. These high loan-to-value (LTV) products are predominantly used by first-time buyers who, given the breakneck growth in house prices seen in recent years, struggle to raise a deposit.

John Glen, the chief secretary to the Treasury, said with families facing challenging economic conditions, “it’s right that we continue to help them secure their first home or move into their dream house”. “Extending this scheme means thousands more have the chance to benefit, and supports the market as we navigate through these difficult times.”

The scheme encourages lenders to offer these deals in uncertain times as they can buy a guarantee on the portion of the mortgage between 80% and 95%. If a borrower gets into financial difficulty and their property is repossessed, the government will then cover that chunk of the lender’s losses.

These high LTV products are often withdrawn in times of turmoil as was the case during the pandemic when predictions of big price falls spooked the market. By January 2021, there were only a handful of 95% mortgage deals left on sale and the government said the scheme helped to restore consumer choice and competition, which has benefited businesses and strengthened the market.

The number of low-deposit 95% mortgages on sale dropped in the financial turmoil that followed Kwasi Kwarteng’s mini-budget, and in the autumn it emerged the government was considering extending the scheme.

David Hollingworth, an associate director at the broker firm L&C Mortgages, said that given the current uncertainty – last week the lender Halifax forecast an 8% drop in house prices in 2023 – it would be “bad timing” to withdraw government support. “You’d be removing a strut at a point in time when market activity is down and there are question marks about house prices,” he said.

When the guarantee scheme was brought in last year, there was a dearth of 95% mortgages available and it acted as a catalyst to bring that part of the market back to life, he said. “Now it is more of a case of don’t withdraw something that could risk affecting this market where availability is still there.”

The mortgage guarantee scheme is different to the government’s help-to-buy scheme. Under help-to-buy, the government would lend a buyer between 5% and 20% of the full purchase price of a newly built home in England, or up to 40% in London.

The buyer still needed a 5% deposit but the government loan meant taking on a smaller mortgage. However, the deadline for help-to-buy applications was 31 October and buyers must legally complete by 31 March when it officially ends.