Author Topic: The state-backed mortgage 'guarantee' scheme.  (Read 4005 times)

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Philofacts

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The state-backed mortgage 'guarantee' scheme.
« on: November 28, 2011, 10:47:42 am »
A new government-backed scheme will guarantee lenders against their losses if certain borrowers fail to repay their loans.
The aim is to encourage lenders to offer mortgages to up to 100,000 potential buyers of newly-built properties who have only a 5% deposit, rather than the 20% deposit most lenders currently require.
It is hoped this will encourage more housing to be built and boost levels of home ownership.

At the moment lenders are reluctant to lend to these people because they fear that house prices may fall, borrowers jobs are insecure and their earnings prospects look too poor to make them a reasonable risk. If the borrower defaulted, the lender would be exposed to losses if after the home was repossessed, it was sold for less than the value of the outstanding loan.
In addition, under international banking rules, lenders have to put aside a much larger financial cushion in their reserves if they lend with a small deposit rather than a large one.

Under the new scheme, if the lender, house builder and you all agree, you can now get a 95% loan.
That is because in addition to your 5% deposit, if the price of the property falls below the 95% loan the lender will be able to reclaim 95% of any losses it incurs.

Although details have yet to be finalised, it should work like this:
The house builder or developer of the new home will pay a sum equivalent of 3.5% of the selling price of the home to the lender, which will be held for seven years.
The developer will receive interest during that time, before the 3.5% is handed back to it. In addition, the government is agreeing to guarantee a further 5.5% of the sale price against loss by the lender.
In effect 9% of the sale price will be in an insurance pot. Under the terms of the scheme, the lender will have insurance for 95% of its loss if the borrower defaults.

The scheme applies to England only. Similar schemes are being considered for Scotland and Wales.

In the past it was the borrowers who paid the premium for a Mortgage Indemnity Guarantee - an insurance policy - if they wanted a mortgage for more than 95% of a property's value.
This industry practice largely disappeared because people objected to paying an insurance premium that benefited only the lender and because then, house prices were rising so fast lenders were less concerned about borrowers defaulting.

If the borrower defaults, they are still liable for the loan as before.

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The Prophet

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Re: The state-backed mortgage 'guarantee' scheme.
« Reply #1 on: November 28, 2011, 11:49:43 am »
First time buyers would be well advised to have nothing to do with this scheme help get a mortgage to buy a brand new home.
Research by the HSBC shows 360,000 first time buyers who bought in 2007 are trapped in their homes due to negative equity after average prices falls of 7%.
New build homes cost at least 10% and sometimes much more than similar local older homes.
They are generally smaller, have small windows and are close to social housing.

House builders price their homes to the maximum their sales managers think they can get, with new home values often being disputed by lenders after their valuations. 
The house builder's site sales staff will now use this scheme as an 'advantage' for buying a new home as 95% mortgages become widespread for new homes due to the government scheme.

It makes little sense to pay over the odds for a new home just because it is the only way you can get or afford a mortgage.


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Sadie20

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Re: The state-backed mortgage 'guarantee' scheme.
« Reply #2 on: November 28, 2011, 12:22:25 pm »
Why is the government underwriting mortgages for just new homes? 
Surely new home owners or anyone needing a 95% mortgage loan should pay for mortgage indemnity insurance themselves.
This should cost about the same as many borrowers already currently pay to lenders in "arrangement fees" for their fixed-rate deals.
Why should lenders be shielded against their losses on their business by the taxpayer?


Philofacts

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Re: The state-backed mortgage 'guarantee' scheme.
« Reply #3 on: November 28, 2011, 12:44:09 pm »
This scheme is similar to the US version.
In the US the FHA encouraged home ownership by underwriting and eventually subsidising mortgages.
Lenders were told to view the state-backed mortgages as if they were as safe as US bonds.

Whilst at present the new scheme is for new homes only, it is only a matter of time before it is extended to the whole mortgage market as people will need to move and may need a bigger house, they will need another subsidised loan.

The lenders are not giving mortgages to young people without a 20% for good reason. They are bad risks. 
House prices could fall further, especially if the Bank of England starts to raise interest rates, which it must do to get inflation under control. Lenders need equity to ensure they are protected from prices falls.

If people cannot afford a house it is better not to subsidise them.
This could be the first step towards our very own sub-prime home loan crisis.
All we can hope is we package all these bad loans and sell them to US banks!
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The Prophet

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Re: The state-backed mortgage 'guarantee' scheme.
« Reply #4 on: November 28, 2011, 01:33:24 pm »
By guaranteeing a lender's potential losses on a property loan, the government is in effect, underwriting the new home mortgage business.
This will lead to higher or sustained prices for new homes as these will be the only homes that those with minimal deposits can get a mortgage for.

The impact on overall home ownership will be limited to new home ownership the main beneficiaries being the house builders.