Mortgage guarantee scheme concerns lenders
Lenders have said there are insufficient details available to decide whether government plans to guarantee mortgages on new-build homes will mean more deals and cheaper rates for borrowers with small deposits.
Several lenders have expressed concern that measures to make buying new-build properties easier were being rushed through with too little thought. One which refused to be identified said the proposals were “as welcome as a cup of cold sick”, while another described them as “insane”.
The government has announced a mortgage indemnity scheme designed to encourage lenders to offer mortgages of up to 95% of a property’s value by guaranteeing that they will not lose money if the property falls into negative equity and is repossessed. The guarantee will be funded by developers and taxpayers.
However, lenders have complained they were not consulted until last week and were coerced into agreeing to the scheme. One detail which still seems unclear is how much of the indemnity the government will be putting forward. Although 5.5% of a property’s value has been suggested by some sources, with another 3.5% contributed by builders and 5% by the borrower, this would mean the lender would still be liable for 86% of the value.
This is likely to prove too high for most lenders, which are usually very cautious about lending high loan-to-value (LTV) ratios on newly built properties, especially flats, which are notorious for suffering substantial drops in value after being sold for the first time.
Some lenders offer lower LTVs on new-build flats than they do on houses. Clydesdale and Yorkshire banks, for example, underwrite all loans on new-builds on an individual basis and differentiate between houses and flats.
Several lenders already offer 95% loans, but these have high interest rates. Borrowers with just 5% deposit can find themselves paying more than 6% on a mortgage – more than double the rates available to those with 20% to put down.
A spokesperson for HSBC said: “We are in principle supportive of the indemnity scheme – the initiative will support the activity we already do to help first-time buyers on to the housing ladder. So far in 2011 one in eight first-time buyers bought their home with an HSBC mortgage. We will work with the government to meet the March 2012 start date.”
Elizabeth Holloway, a spokeswoman for the Woolwich, said: “It is all to be confirmed in terms of details, but we have agreed in principle to participate.”
Holloway said the scheme was similar to Woolwich’s Perfect 10 deal, a scheme run with developer Bovis Homes which allows borrowers to buy a new-build property with a 90% mortgage. The rate on that scheme is 3.79% – lower than on its other 90% loans.
Nationwide, which offers a 95% mortgage with a rate of 6.14% through its Save to Buy scheme, and Yorkshire Bank, which charges 6.19% on its 95% deal, said it was too early to say if the guarantee would allow them to cut rates.
Ray Boulger, senior technical manager at broker John Charcol, said lenders were currently having to charge more for large loans as banking rules meant they had to have larger amounts of capital in place to back the mortgages.
He said that to be effective the guarantee scheme would need to allow lenders to fund their mortgages as if they were only lending smaller amounts. “If this doesn’t bring down mortgage rates for 95% loans then the whole thing is completely pointless,” he said.
The Council of Mortgage Lenders’ director general, Paul Smee, said it was “anticipated that lending within the scheme will attract relief on the regulatory capital that would otherwise be required on high loan-to-value lending, because of the significant mitigation of the lending risk.”
However, the CML said details were still being ironed out.
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