Criticism of mortgage indemnity scheme mounts

| December 6, 2011
Criticism of mortgage indemnity scheme mounts

PSigma Investment Management’s chief investment officer, Thomas Becket, has added his voice to the growing criticism of the government’s mortgage indemnity scheme.

According to Money News, Mr Becket claims that the scheme is doomed and that a return to 95 per cent loan-to-value (LTV) ratio mortgages will cause problems in the future.

The scheme was announced by the Chancellor last week as part of the government’s housing strategy.

It is designed to help first time buyers take their first step on the property ladder and will offer 95 per cent loan to value mortgages for new build properties.

When a new home is sold through the scheme, a participating housebuilder will deposit 3.5% of the sale price in an indemnity fund, while the Government will provide a guarantee of 5.5% of the property value.

If the buyer defaults on their mortgage, the lender will be able to call on the guarantee.

The Government’s contribution will only be used if a defaulting buyer’s losses exceed the developer’s 3.5% and the government’s liability will be capped at £1 billion.

However, Mr Becket believes that with another recession believed to be imminent the scheme may be unwise.

The scheme has also been criticised by London mayoral candidate, Brian Paddick and entrepreneur James Caan of Dragons Den fame.

At a Movers & Shakers breakfast debate last week the pair said that the scheme could encourage house buyers to take on a mortgage which they can afford while interest rates remain at historically low levels, but they could end up losing their home when interest rates rise.

Experts also warned that with property prices expected to fall, house buyers could end up in negative equity.

The government plans to evaluate the scheme after two years, in order to decide if it has had a beneficial effect on the new-build property market.

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