Ministers plan to guarantee low deposit first-time buyer mortgages to get them on the property ladder

Published 17th Nov 2011

First-time buyers could be given a boost by a radical scheme that would guarantee low deposit mortgages to help them get on the property ladder.

Chancellor George Osborne is expected to reveal ‘mortgage indemnity guarantees’ backed by the Government, aimed at those who can’t raise enough for a deposit.

First-time buyer numbers are stuck near record lows and raising a deposit is the biggest barrier to securing a good mortgage rate and buying a home - the plan would seek to overcome this hurdle.

A mortgage indemnity guarantee would reduce the risk of mortgages where borrowers put down a small deposit and protect lenders when homeowners fell into negative equity.

If a home had to be sold for less than its mortgage value, the lender could claim on the guarantee.

The aim is to allow potential buyers to access mortgages with just a five per cent deposit and still get a good rate, rather than the current average deposit for first-time buyers, which is running at 20 per cent.

According to Council of Mortgage Lenders completion figures this means the average first-time buyer needs to find £26,000.

That is lower than the average 25 per cent deposit the average first-time buyer had to find at the height of the property slump in 2009, which equated to £33,000.

However, the long term average loan-to-value for first-time buyers prior to the arrival of the banking crisis in 2008 was 92 per cent. Throughout the 1980s and 1990s, the average loan-to-value for first-time buyers was higher at 94 per cent.

The Council of Mortgage Lenders yesterday called on the Government to continue its stamp duty help for first-time buyers which removes it for purchases under £250,000 - saving them up to £2,500. It would be likely to through its support behind a mortgage indemnity scheme.

CML director general Paul Smee said: 'While there is no clear evidence that the stamp duty concession has incentivised an increasing number of first-time buyers to buy, it is highly likely that there would have been fewer of them if it had not been in place. The CML believes it would be a mistake to pull the plug on the concession - at least until the housing market returns to a firmer footing.

'First-time buyers need to get the message that the government supports them as they take their first steps into a housing market where confidence needs to be restored. The housing market can act as a force for growth in the economy, but if this is to happen then buyers, lenders and builders alike all need a clear message that the government sees them less as part of the economic problem, than as part of the economic solution.'

The mortgage indemnity guarantee – or MIG – would be similar to an insurance product that would protect higher loan-to-value mortgages.

If the home had to repossessed or sold for less than the outstanding mortgage balance the lender could recoup their loss by claiming on the indemnity.

Any mortgage guarantee scheme is likely to be introduced in conjunction with housebuilders, who have already teamed up with the Government to offer first-time buyer incentives to boost their ability to raise a deposit.

MIGs have been championed by construction firms, including housebuilder Redrow, and the CBI.

Mortgages at up to 95 per cent loan-to-value are currently still available but at much lower levels than before the credit crunch hit.

The loans are also unattractive as they command much higher rates, owing to lenders taking on more risk of borrowers falling into negative equity but also because under financial regulations banks and building societies must hold more capital against low deposit mortgages.

With funding limited, many lenders have chosen instead to concentrate their resources on less risky bigger deposit borrowers.

Treasury sources told the Daily Mail that reports the Chancellor would unveil the scheme a week on Tuesday were ‘speculation’.

Source: ' ThisIsMoney '

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