Help for borrowers with small deposits will only work if Government gets the details right say mortgage banks

20th March 2013

The Government is launching a £12 billion mortgage guarantee scheme which could in theory support loans worth £130billion.

On the broader scheme, the Council of Mortgage Lenders has warned that the Government must get the details of the guarantee scheme right for banks to be able to lend to those with lower deposits.

Meanwhile Henderson Chief Economist Simon Ward has pointed out that the guarantee is self funding with lenders expected to purchase those guarantees.

Ward writes: “The most significant announcement was an extension of support for the housing market via an expansion of equity loans and the introduction of a mortgage guarantee scheme of up to £12 billion, estimated to be sufficient to support lending of £130 billion. The latter scheme, however, will be self-financing – banks must purchase guarantees from the government and will pass the cost on to borrowers. Mortgage access, in other words, will improve but at the expense of affordability.”

His full Mindful Money column is here. That may well explain why lenders are saying they need to see the details of what it will mean for their capital requirements.

The Chancellor also announced the Government will commit £3.5bn towards shared equity loans over the next three years which is expected to support up to 74,000 more homebuyers.

Borrowers must have a 5 per cent deposit to secure a 20 per cent loan from the Government. The loan will be interest-free for five years and will be repayable on sale. To qualify, homes must be worth less than £600,000.

Stephen Noakes, Mortgage Director at Lloyds Banking Group, said: “We are very supportive of innovation in the housing market and believe that the mortgage guarantee scheme, will give a much needed boost to the housing market and most importantly address the issue of accessibility.

“Since the launch of the Government’s Funding for Lending scheme we have seen mortgage rates hit an all-time low, really making a difference to affordability. These proposals will, just as importantly, address accessibility, and provide a genuine solution to the challenge of raising a deposit. Working together these two schemes will get more people on and moving up the property ladder.

The Council of Mortgage Lenders said in a statement: “Clearly, to be successful the voluntary scheme will need to be robust, not overly complex, result in the delivery of products that are attractive to borrowers, and be commercially viable for lenders. To achieve this, the scheme will need to ensure that all lenders will be able to gain capital relief in recognition of the risk mitigation offered by the Government guarantee. A successful scheme could ultimately enable lenders to offer more low-deposit loans than they would otherwise be able to do without incurring concerns from funding markets, prudential regulators, or their own internal risk committees.”

Home Builders Federation executive chairman Stewart Baseley said: “A lack of affordable mortgage availability remains the biggest constraint on housing supply, something Government now clearly understands and is looking to address. Extending NewBuy to the second hand market should create churn in the market place and drive up sales across the Board – including for new homes. We do though need to ensure a level playing field across the whole market.  Extending FirstBuy is very welcome and will provide a real option for people currently unable to buy – so providing a vital market for the new homes industry. Building the homes the country desperately needs can be a key driver of economic activity. Government must be praised for its attempts to stimulate activity, but must also be wary to get the details right.”


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