British finance minister George Osborne gave details on Tuesday of a scheme to help riskier borrowers buy their first home, courting controversy at a time when Britain's housing market is already gathering pace. The Help-to-Buy scheme, unveiled by the government in March, will enable Britons to buy a house with as little as a 5 percent deposit - a lending practice common before the financial crisis but one that most banks have avoided since.
Osborne says the scheme will boost construction, noting that house purchases are well below pre-crisis levels. But critics argue a mini-boom in house prices is already underway due to an earlier government scheme to boost mortgage lending, and data from the British Bankers' Association on Tuesday showed the most mortgage approvals since January 2012.
"There is serious concern that the Help-to-Buy mortgage guarantee scheme could eventually fuel a housing price bubble," said Howard Archer, economist at IHS Global Insight. "While we suspect that this is unlikely to occur in the near term at least given the current pressure on households, it is clearly something that policymakers will need to keep a very close eye on," he added.
The first phase of the scheme, which offers buyers of new-build properties an interest-free five-year loan for 20 percent of the property's value, kicked off in April. But the more important second phase, which offers 12 billion pounds ($18.4 billion) of guarantees to back mortgages to buyers who lack large deposits, does not come into force until January.
"The mortgage guarantee will support an increase in high loan-to-value mortgages for people who can't afford large deposits and it will also boost house building," Osborne said. Osborne added that the lack of mortgages available to buyers with only a 5 percent deposit represented a market failure, and that such borrowers would keep up their loan repayments.
The Council of Mortgage Lenders - which represents mutually owned building societies as well as banks - said it welcomed the detailed guidelines Osborne had just given the industry. "The mortgage market is open for business, and it is clear that government support has helped to create more favourable market conditions for home-buyers," said CML director-general Paul Smee. Housebuilders such as Barratt Developments and Taylor Wimpey also said they were starting to build more homes.
SUPPLY CONCERNS But the International Monetary Fund and the government's own budget watchdog, the Office for Budget Responsibility, have both warned that prices are likely to be pumped up more than supply, making it harder, not easier, for first-time buyers.
Bank of England policymakers have expressed concern about state intervention in the market and what will happen to prices when the mortgage guarantee scheme ends in three years' time. The government said on Tuesday that borrowers would need to have a good credit history, provide proof of income and satisfy the affordability criteria recently set out by Britain's consumer financial regulator, the Financial Conduct Authority.
The government also said taxpayer guarantees could not be used by wealthy people wanting to purchase second homes, and were only valid for houses costing up to 600,000 pounds - an attempt to prevent its use for purchases of luxury properties. Mortgage lenders, it added, would be required to collect a declaration stating that the borrower had no other property.
Details of the commercial fees charged to lenders have yet to be announced. The government said the fee structure would depend on loan-to-value bands and would be finalised following discussion with the banks and building societies. "It will be set to encourage as many lenders as possible to participate in the scheme, while protecting the taxpayer," the finance ministry said.