From this week, people in England can get a helping hand to clamber up the property ladder. The government is launching its mortgage indemnity scheme, which will see building firms and the government act as co-guarantors on new home purchases.
Under the NewBuy scheme, banks will be protected against losses if they offer 95% mortgages on new build properties. In order to safeguard the loan, the builder will pay 3.5% of the sale price of a new property into a special account held by the lending bank for seven years.
This money will be used to cover any losses to the lender if house prices fall during that period. At the same time, the government will provide an additional guarantee of 5.5% of the sale price, but this money will only be paid out to lenders in the event of a major property crash.
NewBuy is available on properties worth up to £500,000 in England only. It already has the backing of the Home Builders' Federation (HBF), the Council of Mortgage Lenders, and seven construction firms.
"NewBuy will help thousands of people to meet their aspirations to buy a new home, freeing up the housing market and helping first-time buyers and those unable to take the next step on the ladder," says Stewart Baseley, executive chairman of the HBF. "The scheme will also provide a vital kick-start for house builders, large and small, who will be able to build the homes and create the jobs that the country desperately needs."
So far, only three lenders have signed up to take part in the scheme – Barclays, NatWest and Nationwide. Barclays is offering a two-year fix at 4.99% and a four-year fix at 5.89%. NatWest is offering a two-year fix at 4.29% and a five-year fix at 4.99%. Meanwhile, Nationwide has launched a three-year fix at 5.69% and a five-year fix at 5.99%. Santander has announced that it intends to offer NewBuy mortgages later in the year.
However, not everyone supports the NewBuy scheme. Some property experts are questioning the logic of the government stepping in and using taxpayers' money to cover the risk associated with 95% mortgages – a risk that the lenders themselves aren't prepared to take on.
"Lenders have raised the amount of deposit required by new borrowers to protect themselves from any fall in values," says property expert Henry Pryor. By stepping in the government is aiming to reduce that risk to lenders, and therefore encourage them to lend by transferring the risk to the taxpayer. But the government can't predict what will happen to house prices so it is "effectively gambling with taxpayer money that house prices are not going to fall".