Giving his annual Budget speech today, the chancellor announced the new Government-backed mortgage guarantee scheme will allow all homeowners with a small deposit to access loans backed by the Government.
The scheme is similar to NewBuy, except it is not limited to new-build properties. It will launch at the beginning of 2014 and will run for three years.
As part of the scheme, the Government will offer a guarantee of up to 15 per cent of the purchase price, with the borrower putting down a deposit of between 5 and 15 per cent.
Lenders will purchase the guarantee from the Government, the price of which will be decided at a later date. However, it will be influenced by the LTV of the mortgage.
The guarantee will last for seven years and lenders will also take a 5 per cent share of net losses above the 80 per cent threshold, to ensure lenders do not lend recklessly. The Treasury says its liability is expected to be no more than £12bn.
Each participating lender will pool the loans they wish to place in the scheme and the Government guarantee will apply to the pool. Lenders will not have to offer a guaranteed mortgage and may choose not to use it, according to the Government. (See bottom of article for an infographic of how the scheme works).
In February, Mortgage Strategy’s sister title Money Marketing revealed the Treasury had held talks with mortgage lenders and trade bodies to explore how mortgage indemnity guarantees can be used to improve access to 95 per cent loan-to-value mortgages, including offering MIGs on older properties.
The chancellor also announced the Government will commit £3.5bn towards shared equity loans over the next three years which is expected to support up to 74,000 more homebuyers.
This is an extension of the £500m shared equity scheme FirstBuy, which launched in 2011.
Borrowers must have a 5 per cent deposit to secure a 20 per cent loan from the Government. The loan will be interest-free for five years and will be repayable on sale. To qualify, homes must be worth less than £600,000.
A rate of 1.75 per cent will begin in the sixth year of the loan before rising by RPI plus 1 per cent in every subsequent year.
Home Builders Federation executive chairman Stewart Baseley says: “A lack of affordable mortgage availability remains the biggest constraint on housing supply, something Government now clearly understands and is looking to address. Extending NewBuy to the second hand market should create churn in the market place and drive up sales across the Board – including for new homes. We do though need to ensure a level playing field across the whole market. Extending FirstBuy is very welcome and will provide a real option for people currently unable to buy – so providing a vital market for the new homes industry. Building the homes the country desperately needs can be a key driver of economic activity. Government must be praised for its attempts to stimulate activity, but must also be wary to get the details right.”
Below are two diagrams from the Treasury detailing how the new MIG scheme will work: