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Labour: Extend mortgage indemnity scheme beyond new builds

Shadow housing minister Jack Dromey is calling for the Government’s mortgage indemnity scheme to be extended beyond new build houses.

Announced as part of the coalition’s housing strategy in November, the scheme see house builders and the Government underwrite a small proportion of some lending on newly built homes. It means lenders can make 95 per cent mortgages available on homes worth up to £500,000 at a reduced risk. The scheme opened for business last Monday.

Speaking to Money Marketing ahead of the Budget, Dromey says ministers should consider extending the scheme beyond the 10 per cent of the mortgage market made up of new build purchases.

He says: “The scheme is at least something from a Government doing virtually nothing to solve the largest housing crisis in a generation. Ministers should now look at extending the scheme because new build properties are only a small part of the market.”

Critics of the scheme have warned new build properties instantly lose value when they are moved into meaning a risk of negative equity among those purchasing them.

Dromey says: “There is a risk of negative equity in some circumstances but that will not be true in all cases. Having said that, borrowers need to be careful and lenders need to be responsible so we do not return to the dark days of widespread negative equity.”

Under the scheme house builders deposit 3.5 per cent of the sale price for each home in an indemnity fund and the Government provides 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.

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.

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. The scheme has merits but should extend to all properties not just new builds. The main winners in the existing proposals are builders / developers who will probably escalate prices accordingly. There is a real danger of negative equity for new builds with this scheme which also places significant choice restrictions on first time buyers. New builds will have an obvious advantage – what happened to free choice and market forces?

  2. I hate to agree with a Labour politician but I believe a similar scheme for the whole market would be a great benefit in kickstarting the housing market.
    Unfortunately the Shadow Housing Minister does as they all do and does not say how the mechanics would work if there are no builders to put 3.5% of the sale price into an indemnity fund. Still it makes a good headline.
    The current scheme also makkes a good headline for the Government but if analysed more closely really only benefits the banks who effectively own many of the developers. Each purchase of a new build creayes no further movement in the housing market – it is a dead sale. The schem says no second homes, but whta if the peoplebuying can’t sell and rent out their existing would the new mortgage on the home they are going to live in be a second home?

  3. Increased credit (as Dromey is recommending) will simply push house prices higher and we’ll all need to borrow more to buy exactly the same places to live in.

    Same size house, bigger debt for all.

    Beneficiaries: Banks and downsizers. Losers: first time buyers and anybody moving up the housing ladder.

    Not a great policy, by anyone’s standards.

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