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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)

  • 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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