New Buy Guarantee

March 29, 2012


95 per cent mortgages back – but the taxpayer takes the risk

Anyone can window shop, but will 95 per cent mortgages get them through the door again?

In the boom years you didn’t need much in the way of savings to buy a house: 95 and 100 per cent mortgages were routine.     But they disappeared with the credit crunch, forcing new buyers to stump up deposits of at least 25 per cent and freezing millions out of the property market.

From this week it will be possible once again to take out a 95 per cent mortgage, thanks to the government’s New Buy Guarantee scheme.   However, the mortgages will only be available on new-build properties and initially there will only be 100,000 mortgages on offer.       To qualify for the scheme the property you are purchasing must be your main home, and there is a cap of £500,000 on eligible properties.

The mortgages have been made possible because they are underwritten by the taxpayer.     The mortgages are being put up by Barclays, the Nationwide and NatWest — part of RBS.      But if a homebuyer defaults on his mortgage and the property ends up being sold, the housebuilders will bear the first 3.5 per cent of losses.    The taxpayer will then suffer the next 5.5 per cent of losses.    For this reason, the scheme is highly controversial.     If the property market falls — and prices are still drifting downwards in many parts of the country — the taxpayer will be highly exposed.

Should you take up the offer?       You should think very carefully before taking out such a large loan.      Remember, it was 95 per cent and 100 per cent mortgages which puffed up the property market in the first place.    For this reason the Financial Services Authority proposed in 2009 that 95 per cent mortgages be banned; something which the then Labour government rejected six months later.    A recovery in the property market is far from guaranteed: even after the slump property prices in real terms (that is, adjusted for inflation) are still a third higher than they were at the height of the 1980s property boom.

An unintended consequence of the New Buy Guarantee scheme may be that it becomes harder for vendors to sell secondhand homes.     They are likely to lose out as buyers are attracted to newly-built homes.      This scheme is unashamedly designed to help the big housebuilders.   It would be perverse if it ended up making it more difficult for owners of existing properties to move home.


About sebastianokelly, joint editor

View all posts by sebastianokelly


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