The Council of Mortgage Lenders says the mortgage indemnity scheme will not compromise the quality of lenders’ mortgage books.
Housebuilders and the Government will absorb 3.5 per cent and 5.5 per cent of any losses respectively if the borrower, who must put down a 5 per cent deposit, defaults and the house price has fallen.
In effect, because the housebuilder, the Government and the borrower are absorbing a combined total of 14 per cent of any losses, it is equivalent to the lender lending at 86 per cent LTV instead of 95 per cent LTV.
Public money will only be at risk if the borrower and the fund cannot cover the costs.
The CML, which helped the Government develop the scheme, says FSA rules and lender discretion will still apply to the lending decision and the subsequent management of the mortgage.
CML director general Paul Smee says: “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 newbuild properties without requiring the level of deposit which has become usual in recent years.”