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Launch of government's mortgage indemnity scheme for purchasers of new Homes

Launched in March, the Government’s New Buy scheme was hailed by David Cameron as a “vital boost to the housing market, giving people good affordable new homes and backing thousands of jobs in construction”.

Its aim was to provide a much needed boost for people seeking first-time buyer mortgages and to free up the housing market.  The scheme is available on houses and flats worth up to £500,000 in England only and it means that buyers may only have to fund a £10,000 deposit on a newly built home of £200,000.

Mortgages would therefore be made available to people witha deposit of just 5%, rather than the 20% typically demanded by lenders since the financial crisis, saving buyers around £34,000 on the average house.  For first time buyers in the capital and existing homeowners who wish to move up the property ladder into larger homes, the introduction of the scheme has undoubtedly been welcome news.

However, more recently the Government has been forced into emergency talks to save its mortgage indemnity scheme.  The launch has been described as far from satisfactory as only three lenders were ready with mortgage products to support the scheme.

Although the aim of the scheme is essentially to get the property market moving again, it has been described as a ‘quick fix’ to address problems in the short term, rather than focusing on strengthening the property market in the long term.  Critics of the scheme have said that first-time buyers run the risk of negative equity by purchasing a new, often over-valued property with only a 5% deposit, even if house prices are fractionally reduced.  Purchasers may also run the risk of being unable to move up the property ladder until property prices rise.

It was hoped that the scheme would create 50,000 jobs by allowing lenders to offer 95% mortgages on new-build homes without taking on all of the risk.

However, there are growing concerns that the banks and building societies involved are charging excessively steep rates, thus undermining the initiative.  Recently Persimmon warned that it is unlikely that the scheme would be successful as lending rates at around 6% are too high.  They have called for lower rates and more entrants to the market.

The scheme has its advantages, but its impact upon the housing market remains to be seen.