Lenders sound caution on new mortgage indemnity scheme

The number of new mortgages that will be lent under the new mortgage indemnity scheme is uncertain – and some would have been loaned anyway.

The Council of Mortgage Lenders has expressed caution about just how much stimulation to the market will be given by the 95% mortgage scheme, which will be available to up to 100,000 buyers of new-build homes.

The CML said that the Government has not mentioned a target for the number of new mortgages under the scheme.

It says: “It would be difficult to determine exactly how many new mortgages are taken out as a result of the scheme, as it is possible some of the loans would have been advanced anyway, though perhaps on different terms.   

“The Government accepts that lenders must decide whether to participate in the scheme, and it wants to uphold lending standards. It will therefore leave it to lenders to determine individual mortgage applications.

“Applicants are likely to be those whose incomes would allow them to take out mortgages without undue stress on their finances but who cannot find the high deposits typically required on newly-built property at present.”

The CML also said it was important that builders did not offer financial incentives to buyers to participate.

It warned that the effect “would be to erode the minimum deposit of 5% that purchasers need to put down under the scheme”.

It added: “In the weeks ahead, we will be working with the Royal Institution of Chartered Surveyors to ensure that its guidance to valuers is clear and robust, and that it addresses lenders’ concerns.”

The CML also warned that another key factor in determining the success of the mortgage indemnity scheme will be how the FSA views it.

The CML adds: “We are optimistic that the FSA will take a positive view of guarantees provided by the Government and builders, and that capital relief will be available to lenders of all sizes wanting to participate. A favourable approach by the FSA would enable lenders to make mortgages at 95% loan-to-value ratio more readily available.”

It continues: “It is important to understand, however, that wherever a scheme operates, it does not force consumers to buy, or lenders to lend.

“Lenders will be free to decide for themselves if they want to participate, and will continue to assess carefully individual mortgage applications, based on the borrower’s ability to pay, individual circumstances and the security provided by the property.

“Borrowers, meanwhile, will need to make their own careful assessment of their ability to meet their commitments, and must be encouraged to act responsibly.”