Under plans to be unveiled by David Cameron and Nick Clegg today, the Government will underwrite a proportion of mortgages for newly built homes – the first time any such scheme has been attempted in the UK.There's more:
By taking on some of the risk of lending, the Government hopes to bring down deposits of up to 20 per cent for first-time buyers to as little as 5 per cent, and to kick-start demand for homes.
The Government will underwrite a small percentage of each loan on newly built property. Banks are typically demanding a deposit of 20 per cent on loans to first-time buyers and, by guaranteeing a portion of the loan, the Government will in effect be shifting that "loan-to-value" ratio so that the borrower needs a smaller deposit – possibly as little as 5 per cent. That, it hopes, will lead to more demand and provide a boost to the construction industry in terms of sales and employment.Don't get me wrong; I'm all in favour of helping first-time buyers. But the value of this scheme seems doubtful. Why persuade such buyers to take on a debt which is so close to the market value of the associated debt? What happens when the mortgage interest rate rises and/or the value of the house declines?
The state would not be first in line in the event of a default. Instead, homeowners would still lose their deposits before the Government suffered losses, which would be shared with the lender.
Does anyone in government ever look at past history? It is not so long ago that negative equity made its appearance ...