Concerns raised over mortgage guarantee scheme

| November 22, 2011 | 0 Comments
Concerns raised over mortgage guarantee scheme

Lenders and financial experts have highlighted a number of potential problems with the Government’s mortgage indemnity scheme, which was announced yesterday.

Banks and building societies have commented that the scheme was rushed through with insufficient thought, while financial commentators warned that first time buyers taking advantage of the scheme could end up owning a house which could plummet in value.

Initially, details of the scheme were sketchy but it has now been revealed that all prospective buyers will be eligible, with the exception of those buying properties as second home or with the intention of letting the property out.

Mortgages of up to 95 per cent loan to value will be available at affordable rates on new build homes from builders who have chosen to take part in the scheme.

House builders will put 3.5 per cent of each property sold under the scheme into an indemnity fund, and the Government will contribute up to nine per cent of the property value.

Lenders will be able to make a claim on the indemnity fund if a property financed under the scheme is repossessed and there is a shortfall.

Builders will be liable for the first loss in the indemnity, while the Government’s contribution will only be used when the builder’s fund has been exhausted.

Barclays, HSBC, Lloyds Banking Group, Nationwide, RBS, Santander and Yorkshire and Clydesdale Banks have all agreed in principle to participate in the scheme but some lenders have claimed that they were consulted only at the last minute and coerced into agreeing to take part.

Lenders are also concerned that there is insufficient evidence that the scheme will be effective in creating more deals and cheaper rates for borrowers with small deposits.

Financial experts have pointed out that the scheme applies only to new build properties, which have fallen in value more dramatically than any other segment of the market since the credit crunch began.

Since October 2007, the average asking price of a newly built property has fallen from around £260,000 to £221,000 and if the price of new homes falls even further, the scheme could cost taxpayers millions of pounds.

Over 25 home-builders have agreed in principle to participate in the scheme, together accounting for over 60 per cent of new homes built in the UK.

The scheme will be managed by the Department for Communities and Local Government and will only be available in England.

Tags: house builders, , mortgage indemnity scheme,

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