Q&A: The new housing strategy
- 21 November 2011
- From the section Business
The prime minister has trumpeted a new housing strategy to make it easier for people in England to buy or rent homes.
The main elements are:
- a mortgage guarantee scheme to encourage lenders to offer 95% mortgages to buyers of new homes.
- an increase in the subsidy available to developers under the "Affordable Homes Programme".
- a change to the rules so that the money from the sale of council houses will go towards the building of new council homes.
- increased subsidies for councils that take over neglected homes which have been left empty for a long time.
The government said the strategy would "tackle the housing shortage, boost the economy, create jobs and give people the opportunity to get on the housing ladder".
How will this help me buy a home?
The most eye-catching aspect is the mortgage guarantee scheme.
This 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, perhaps, just a 5% deposit, and not the 20% deposit the lenders typically require at the moment.
What is the point?
At the moment lenders are reluctant to lend to these people because they fear that house prices may fall.
That would expose lenders to losses if the borrower defaulted, the home was seized, and the house or flat was then sold for less than the value of the loan.
Also, 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.
That too inhibits lending mortgages to people with only small deposits.
How will the scheme work?
Let's suppose you want to buy a newly built flat selling for £100,000 but can only put down a £5,000 deposit.
At the moment your chances of being offered a 95% mortgage for the rest are non-existent.
Under the new scheme, if the developer, lender and you all agree, you may now be offered the 95% loan you desire.
That is because on top of your deposit, which will absorb the first £5,000 of any fall in the value of your home in the event you cannot repay the loan, the lender now has further comfort.
If the price of the property falls below £95,000, the lender will be able to reclaim 95% of any losses it incurs.
What are the details?
The Council of Mortgage Lenders (CML) says the details have still to be finalised, but it will work this way.
The developer of the new property 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 will agree to guarantee a further 5.5% of the sale price against loss by the lender.
So, 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.
To what sort of people will this apply?
The scheme will cover any lender who wishes to take part; any buyer of a newly built home who would like some help; and any developer that also wishes to take part.
There is no compulsion on any party to take up the scheme if they do not want to and there is also no automatic entitlement.
And just to keep things a bit vague, there are no targets for how much money will be available, or how any people might eventually benefit.
The scheme applies to England while similar ones for Scotland and Wales are being considered.
Didn't this sort of arrangement exist before?
Yes. Once upon a time it was standard practice for lenders to ask borrowers to pay a premium for something called 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, for two reasons.
The first was that it became objectionable for people to pay for insurance premiums that benefited the lender but not themselves.
And lenders stopped bothering because house prices were rising fast and they were quite happy to throw money at potential borrowers, rather than worry about them defaulting.
If a borrower defaults, can they stop worrying if they have fallen into negative equity and can no longer repay the whole of their outstanding loan?
No, they are still liable for any loss on their loan.
So if you defaulted, the lender could recoup 95% of its own loss, then chase you for the loss too.
If it was then able to recoup that money from you - assuming you still had any - it would then repay the insurance payment to the scheme.
So this is not a "get-out-of-debt free" card for individual borrowers.
It directly benefits your lender. You gain the indirect benefit of obtaining a loan that you would not otherwise have been given.