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Labour: Extend mortgage indemnity scheme beyond new builds

Shadow housing minister Jack Dromey is calling for the government’s mortgage indemnity scheme to be extended beyond new build houses.

Announced as part of the coalition’s housing strategy in November, the scheme see house builders and the Government underwrite a small proportion of some lending on newly built homes.

It means lenders can make 95% mortgages available on homes worth up to £500,000 at a reduced risk. The scheme opened for business last Monday.

Speaking to Mortgage Strategy’s sister publication, Money Marketing, ahead of Wednesday’s Budget, Dromey says ministers should consider extending the scheme beyond the 10% of the mortgage market made up of new build purchases.

He says: “The scheme is at least something from a government doing virtually nothing to solve the largest housing crisis in a generation. Ministers should now look at extending the scheme because new build properties are only a small part of the market.”

Critics of the scheme have warned new build properties instantly lose value when they are moved into meaning a risk of negative equity among those purchasing them.

Dromey says: “There is a risk of negative equity in some circumstances but that will not be true in all cases. Having said that, borrowers need to be careful and lenders need to be responsible so we do not return to the dark days of widespread negative equity.”

Under the scheme house builders deposit 3.5% of the sale price for each home in an indemnity fund and the Government provides additional security of 5.5%. The house builders contribution will be held by the lender for seven years and interest will be payable on it. Funds will be returned to the developer after the seven year period minus a portion of any losses on the loans in the scheme.

In the event of repossession, and the house being sold at a loss, the lender will be able to recover 95% of any shortfall through the scheme. Public money will only be at risk if the borrower and the fund cannot cover costs.

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