The Government’s 95% mortgages indemnity scheme could fail unless lenders are given capital relief when lending at higher loan-to-value ratios.
The scheme, which will launch in spring next year, is designed to encourage lending up to 95% mortgages.
Housebuilders will deposit 3.5 per cent of the sale price in an indemnity fund for each home sold through the sch-eme, which will be returned to the firm after seven years, minus a portion of any losses. The Government will provide additional security of 5.5 per cent and the borrower must have a 5 per cent deposit.
Under the Basel accords, lenders are required to hold eight times more capital when lending at 90 per cent LTV and above than at lower LTVs.
The Council of Mortgage Lenders hopes that lending within the scheme will attract relief on the regulatory capital required on high LTVs. Building Societies Association head of mortgage policy Paul Broadhead says it is possible that capital requirements could be reduced due to the Government’s involvement in the scheme and the fact the indemnity is a cash fund and not an insurance policy.
A Department for Communities and Local Government spokesman says the details of any potential capital relief for lenders are still being finalised.
John Charcol senior technical manager Ray Boulger (pictured) says: “If the presence of a Government-backed Mig does not lower banks’ capital requirements then the whole scheme will be completely pointless because the key reason that banks are not offering higher-LTV loans is because of the amount of regulatory capital they have to set aside.”
Industry consultant Jonathan Cornell says: “If someone is ensuring the value of the debt between 75 per cent and 95 per cent LTV, then common sense would suggest those loans should attract a lower capital weighting.”
Mig scheme details
The scheme aims to create an indemnity fund to minimise potential lender losses on loans for purchase of newbuild properties
The Government hopes this will boost the housebuilding industry, make 95% mortgages more easily available and help first-time buyers
Housebuilders will put 3.5 per cent of the sale price of every newbuild property into the fund, which will be held by the lender for seven years. Interest will be paid on the money which will be returned to housebuilders, minus any losses on loans in the scheme
The Government will provide an additional security of 5.5 per cent of each property’s value. This will not be handed over to lenders and will only be called on when the buyer and the scheme cannot cover losses
The Government has made provision for 100,000 mortgages.
95% mortgages applicants must have a minimum deposit of 5 per cent. In the event of repossession and the house being sold at a loss, the lender will be able to offset 95 per cent of its loss against the fund