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Government unveils mortgage indemnity scheme details

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The Government has announced details of its mortgage indemnity scheme to help first-time buyers of newly built properties to borrow up to 95 per cent of the value of their home.

At the CBI conference in London today, the Government is setting out a series of measures aimed at kick-starting the mortgage market.

With banks unwilling to lend to borrowers without sizable deposits, the Government will underwrite a small proportion of some lending on newly-built homes to help first-time buyers get on the property ladder.

The paper laying out the proposals, Laying the Foundations: A Housing Strategy for England, says house builders will deposit 3.5 per cent of the sale price in the indemnity fund for each home sold through the scheme.

The Government will provide additional security of 5.5 per cent. The house builders contribution will be held by the lender for seven years and interest will be payable on it. Funds will be returned to the developer after the seven year period minus a portion of any losses on the loans in the scheme. A central administrator will create “silos” of funds that apply between lenders and house builders.

In the event of repossession, and the house being sold at a loss, the lender will be able to recover 95 per cent of any shortfall through the scheme. Public money will only be at risk if the borrower and the fund cannot cover costs.

The scheme will begin operating in the spring and will be open to all house builders and lenders operating in England, although similar schemes are under consideration for Wales and Scotland. The Government has made provision for up to 100,000 mortgages to be backed by the MIS which it says represents a “manageable risk”.

The Council of Mortgage Lenders helped develop the scheme with Government and the Home Builders’ Federation. The CML backs the move saying it will provide a fillip to the housing market and the wider economy as well as reducing regulatory burden on lenders.

CML director general Paul Smee says: “It is anticipated that lending within the scheme will attract relief on the regulatory capital that would otherwise be required on high loan-to-value lending, because of the significant mitigation of risk.

“UK lenders will not be compromising the quality of their lending or increasing their risk of loss through this scheme. It will however allow credit-worthy borrowers to obtain higher loan to value mortgages on new build properties without requiring the level of deposit which has become usual in recent years.”

This will include a £400m Get Britain Building fund to target housebuilding schemes that have stalled through a lack of development finance. It is set to “unlock” the construction of up to 16,000 homes and around 3,200 of those would be affordable properties.

Housing minister Grant Shapps told the BBC this morning that the Government was not looking to “pump up” the housing market but to help people get on the housing ladder in a “responsible” way.

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Readers' comments (15)

  • It looks like governments in the UK never learn that government subsidies of the housing market are a mistake. The reasons why the housing market is not moving is that government continues to subsidise housing market by not allowing a full correction to take place. We know from the past 30 years that government subsidies only inflate house prices especially if banking lending policy is also encouraged to be looser.

    The repossession rate is relatively low compared to the amount of people that are in trouble with their mortgages, due to the fact that government are making it extremely hard for lenders to repossess property. This may be a desirable effect but it is giving a false impression of the present value of property in the UK, as many people are not forced to sell.

    It is also the reasons why many banks are down valuing property when it comes to mortgages, as they know property is overvalued in the UK. I'm primarily talking about property outside of London.

    Conservatives preach market forces but are scared to allow market forces and housing market to take its natural course as it would be political suicide for any politician. Nobody wants to see a 40% drop in house prices from 2007 prices, but in reality that is what is required, as the last five years of the housing bubble should have never happened, as there was a considerable delinking of income to mortgage size.

    If government really want to help the housing market they should start building council houses back up with the right to buy. If the house is subsequently sold under the right to buy, then the local authority will have a responsibility to build a replacement house. The government could fund this by creating a new infrastructure loan investment which would pay a dividend based on a percentage of the rent income, these investments could provide tax-free rate of return for investors which would attract money from pension funds and other private investments. I'm sure that this scheme would be self funding in the long term and would also make the housing market in the UK more viable. Governments can look 50, 60, or even 70 years into the future private developers cannot and the government should get its finger outfits ass and start doing that job sooner rather than later.

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  • This is a big mistake. The market should not be subsidised and this seems more like a PR move.

    I agree with Peter Herd that a full correction needs to take place. This is just supporting prices that remain too high.

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  • ain this is FTB in new built properties . The reason the housing market is the way it is , is because all these things are on new built. People who bought new built FTB properties a few years ago cant sell them because new FTB dont have deposits that means the second time buyers are stuck . Just building new build FTB properties will not resolve the proble justcause a train wreck

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  • Agree with Peter and Patrick. A significant price drop will do much more for 1st time buyer affordability that any gimmick like this. A gimmick which I expect will cost the taxpayer (i.e. us) a lot of money. Have no lessons been learned from the US housing debacle?

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  • This Scheme sounds good but could be dangerous for potential borrowers. However when economists are predicting a 10% fall in house prices this year, having the government encouraging first-time buyers to get on to the ladder using a low deposit could be viewed as irresponsible.
    Potential first time borrowers would be wise to be sceptical about jumping into this scheme as property prices are still high and they could easily end up in a negative equity situation with a mortgage on a property that is worth less than the mortgage outstanding and preventing them from selling.
    Is the government offering this scheme to help First Time Buyers? Or is its main purpose to help out the house building sector, which is suffering If this is not the case why is the scheme only available for new build properties?
    It’s alright getting on the property ladder but not if the rung breaks at the top and your stuck there.
    I will offer this scheme to my clients when it is available but I will be giving some warnings about negative equity and the over pricing of new build properties

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  • This is all well and dandy, but it is going to do little to kick start the housing market.
    “At the CBI conference in London today, the Government is setting out a series of measures aimed at kick-starting the mortgage market” This will cater for a small percentage of the sales going forward.

    Helping all First Time Buyers would have started a movement in the overall market. Without first time buyers, there are no second time and third, fourth time buyers. Helping buyers of new builds will not start the knock on effect.
    Not sure where the first two comments think the full correction will fall, no matter where it is, it is of little consequence because there is little movement in the market. I am not sure where they are getting their rhetoric from, I fear from stats and previous comments, the reality is market forces will dictate the property value and current market forces dictate a fall in prices.

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  • To Steve Cornish,

    Is it market forces that really sets house prices - I think not!

    The present condition in the housing market has highlighted that the organisation that really sets house prices is lenders. I've heard for many years the argument that market forces control house prices when it fact is the amount of money that somebody can borrow that really sets house prices. The reasons why we have not seen a full correction in the housing market is because of super low interest rates and government incentives to keep people in their homes e.g. state benefits mortgage interest relief.

    In the last bust during the mid-90s repossession rates top-out at around 100,000 per year, I believe at present repossession rate is just under 60,000.

    Unless we have a full-scale correction the type of subsidy your looking for into the housing market to get first-time buyers to buy would cost many billions of pounds in taxes. It would also probably stoke inflation which is why subsidies like this in the past have been so disastrous.

    We have a generation of individuals that are up to eye balls in mortgage debt with no savings and no pension so why on earth would we want to repeat that lesson the next generation. What is required in the UK is a sustainable housing market that benefits everybody instead of only benefiting lenders or a few mega rich developers. If you want to know where this ends up just go to Ireland and Spain.

    It's interesting that one European country with a very stable housing market also has one of the most stable economies e.g. Germany. They rent more than we do and when they buy their buy with a very large deposit and a fixed rate mortgage.

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  • House prices should be determined by market forces. Principal among these is supply and demand. High demand and low supply prices go up. The only thing that is hamstringing the UK property market is the abscence of 95% mortgages - bring these back and the market recovers overnight.

    We have higher house prices here because we have higher population density than just about anywhere else.

    As to those on the affordability arguement - in my area of the South East a 2 bed house sells for c £150,000 while renting one costs c £800 per month. A 95% mortgage costs £862.71 over 30 years.

    Given the choice who would rent?

    As you might have guessed I have worked hard all my life and have a fair few bob tied up in property. But so have millions of others. Those who suggest artificially slashing the value of millions of people's life savings must be on a different planet to the rest of us!

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  • To Simon Webster

    The supply demand argument for house prices is also been a very common theme over last 30 years. Are you really saying other European countries do not have the same housing demand, I think that you'll find Germany has a population around the same as UK although I do recognise that it is a much larger country.

    I would ask people that support the theory that house prices should always rise higher than inflation because of supply and demand. They should ask themselves the question. Why was it that house prices outside of London dropped by more than 35% in the mid 1990s. The demand for housing never changed in fact the demand went up.

    The reasons why house prices dropped was the fact that interest rates and inflation got out of control and the repossession rate in the UK went through the roof which resulted in a major correction in the housing market.

    When Labour came to power in 1997, one of the first things that they did was to let lenders off the leash and to regulate banks in a very light touch way, which resulted in a massive expansion of mortgage borrowing. One of the worst inventions at this time was the self certified mortgage. This reckless lending also spread across the Atlantic to America, where up until this time they had a very stable housing market as you commonly required a 25% deposit to buy in America pre 1997. When our banks started lending in America they experienced a huge increase in house prices that resulted in the 2007 housing collapse. The only thing that has stopped that type of collapse happening over here is super low interest rates and housing related benefits, which do not exist in the US.

    I don't want to see collapse in house prices but like any investment what goes up can come down and all investors in property should be purchasing for the right reasons. If you have a buy to let portfolio recognise that like any other investment these investments are subject to market falls.

    I personal experienced negative equity in the mid-90s and know how miserable it is, I also remember paying my mortgage at 18%, what has annoyed me over the last 15 years is that many mortgage advisers and the lenders that always talk the market up.

    What happens to your £862 if interest rates take off and then what happens to the capital value.

    My viewpoint may not be a popular one and it may not make any money but at least it's an honest one.

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  • Will these mortgages be regulated by the FSA?

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  • I think Peter makes some good arguments in his comments. However, people need somewhere to live and responsible lending at 95%, as it was some years ago, is not a bad thing. It was the proliferation of 100% or greater lending, plus other no money down schemes (including the 'liar' self certs) that forced the crisis.
    What is happening now is that the rental sector is booming with ever increasing rents. This is the environment of the buy to let investor (of which I have no problem with, by the way) who benefits most.
    One commentator mentioned that reposessions are at an all time low due to Government intervention - the reality is this is due more to FSA intervention in their TCF programme with lenders, and an appetite to take enforcement action against them.
    I would like to see how this inititiative will develop but I have fears that it is more politically driven due to the fact that it is targeted at new builds. This does not make sense as developers will artificially increase prices knowing their properties suddenly have a government backed target audienhave a market advantage over 'older' properties.

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  • This scheme has few merits, as said by many before it creates an artificial market.
    Seems a very low risk scheme for the banks, a low risk scheme for this Government as by the time any future claim is made we will have had another election.A no risk scheme to the builders who will simply inflate even more the existing inflated prices to cover their premium.
    The whole risk seems to be held by the poor new young FTB, who will lose their 5% first.
    I hope the whole of this industry, including bank advisers and brokers are prepared to give the true facts to the customer and not just chase a sale.In the end the valuers will need to be protect the customer.

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  • There are some honest advisor around, but you are right MC there are a lot of vested interests

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  • As a prospective FTB in the North-East of England, what advice can be trusted? Will house prices continue to drop? Houses in my area, at least, seem to be selling. I am fed up with wasting my money on rent, which leaves me with nothing, whilst I continue to pay for the landlords mortgage, but all I hear is fear the negative equity. Just what should someone in my position do?

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  • Further to the above, I have recently had an experience pertinent to this development. We were looking to purchase a new build property recently, part of an 'affordable housing' scheme; were told a 10% deposit (which we have saved against all odds) was required and various criteria needed to be met, regarding links to the local area amongst others.There was a 25% reduction in property price, although this was never described as part-ownership and only as a price reduction. We were accepted into the scheme and awaited completion. As this approached, we sat down with the mortgage advisors linked to the scheme, which was also a requirement. It soon became apparent that they were having a lot of trouble attracting lenders, various reasons were given, regarding 'fitting the scheme into existing frameworks' being not possible (!). The only lender involved therefore, at 10%, was offered at an exorbitant rate rendering the 'affordable' tag completely moot - those with large deposits (or rather parents with deep pockets) were offered a much healthier option (don't even get me started on what I think of 'helping hand' mortgages). It also became pretty obvious as the houses approached completion that the resale value of the properties would be nowhere near the evaluation as a new-build. On top of that, if lenders are reluctant to get involved, if we decided to sell in the coming years, with the 'price reduction' still in place, we would face an impossible task. We have pulled out of the scheme and are now looking to buy on the open market (hence my request for advice earlier), but many have bought into the scheme - we think we have made the right decision, any thoughts?

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