The government recently announced its backing of a mortgage indemnity scheme that will allow higher loan to value lending for buyers of new build properties.

The full details of the scheme won’t be finalised until the spring, but we have compared the new scheme with Firstbuy, the government backed shared equity scheme announced in this year’s Budget.

 

We believe borrowers looking at the new build indemnity scheme will share similar characteristics with those for whom Firstbuy was aimed at, in that they do not have a big enough deposit to borrow on the open market.

Here are the facts -

• With the indemnity scheme, the builder puts in 3.5% of the value of the property
• With Firstbuy, they put in 10%.
• This means the indemnity scheme will enable a builder to support around three times as many properties with the same sum of capital than with Firstbuy.
• For borrowers, it will not reduce monthly costs as a shared equity loan does, but it does not require the borrower to find a large cash sum at a future date.
• Borrowers with Firstbuy have to repay the equity loan in the future.
• The indemnity scheme will only be available to borrowers taking out a repayment mortgage. So, if in seven years house prices are roughly the same, those who borrowed with a 5% deposit today will be sitting on equity of over 20%, worked out using a notional interest rate of 5%. So anyone using the indemnity scheme to buy a property should be easily able to remortgage onto any product once their equity has increased sufficiently.

The main point to make though is that from a customer’s point of view, this scheme should re-open access to higher Loan to value lending, and many may find that preferable to share equity.

But, borrowers need to recognise that taking out one of these loans is no different to taking out any other 95% Loan to value mortgage, and they have to weigh up the level of risk with their desire to be home owners.

The government has revealed the names of the lenders that have signed up to its indemnity scheme announced today as part of its housing strategy.

It says Barclays, HSBC, Lloyds Banking Group, Nationwide, Royal Bank of Scotland, Santander and Yorkshire and Clydesdale Banks have agreed in principle to participate in the scheme, which will see them lend up to 95% LTV on new-build property.

The government will underwrite part of the risk on the loans alongside house builders.

It has also confirmed that over 25 developers have agreed in principle to joining the scheme, including Barratt, Persimmon and Taylor Wimpey, the three largest builders in the UK.

It says it hopes that other lenders and builders will want to participate in the scheme.

The government has now released further details of how the scheme will work, revealing that the builder will contribute 3.5% of the value of each property sold under the scheme into an indemnity fund, with the government supporting the fund to a total of 9% of the property’s value.

The indemnity fund pays out to the lender if a property financed under the scheme is repossessed and there is a shortfall. Builders will take the first loss, with the government only being called upon to pay once the builder’s fund has been exhausted.

Lenders and builders will retain the right to decide which builders and lenders they wish to engage with. The government will establish a delivery group of lenders and builders to meet with on a regular basis to monitor the practical implementation of the scheme.

There will be a cap on the value of properties eligible for inclusion in the scheme.

The scheme will be delivered by the Department for Communities and Local Government and will be available in England only.

 

The report by the Institute for Fiscal Studies, which it describes as the most far-reaching analysis of the UK tax system in more than 30 years, also recommends integrating income tax and National Insurance payments.

Targets for change include Inheritance Tax where the individual would be taxed and not the estate on a person’s death.

The IFS believes there is also a case for taxing gifts of cash over the recipient’s lifetime. But it says that exempting estates from capital gains tax should definitely stop.

The report describes housing taxation as “a mess” and recommends that instead of stamp duty, residents of larger houses would pay more council tax so that bills reflected real property values.

Review chairman Sir James Mirrlees, the Nobel Prize economist who gave his name to the five-year report, said: “The system imposes unnecessary costs on the economy.

“It reduces employment and earnings more than it needs to. It discourages saving and investment and distorts the form they take.

“It favours corporate debt over equity finance. It fails to deal effectively with either greenhouse gas emissions or road congestion.” The IFS believes the Government could raise just as much money and distribute wealth around the population in about the same proportions as now but in much cheaper ways, by moving to the simpler system it recommends.

Taxes raise £500billion a year, taking about £4 in every £10 earned in the UK.

 

Housing taxation is one area the IFS says is crying out for reform.

Stamp duty is levied on the whole value of a property.

It varies from one per cent on houses sold between £125,000 and £250,000 (except for first time buyers who pay nothing), three per cent on homes worth over £250,000, four per cent over £500,000 and five per cent over £1million.

The IFS said it was among the most “inefficient and damaging” of all taxes.

Scrapping the tax would remove a disincentive to moving home, which keeps some people in bigger properties than they need and would help free up the housing market.

Council tax, currently based on 1991 values and capped, would be reformed into a “housing services tax” levied as a proportion of actual value with no cap and no discount for unoccupied or single-person homes

 Three years ago today, the collapse of Lehman Brothers sent shockwaves around the world, resulting in sheer panic in the financial markets and driving the final nail in the coffin of the wholesale funding markets.

 
Suddenly, big banks really could be allowed to fail.

The spectacular bust of America's fourth largest investment banks on 15 September 2008 lead to the bailout of multiple major banks in the UK and US and stiff action from governments to prevent a severe depression.

 

Clearly, the ramifications of Lehmans' bankruptcy, a year after the credit crunch and five months after it pulled out of the UK mortgage market, are still being  felt today.

 

Funding remains extremely restricted, banks are still attempting to repay their debts as several remain within the public purse, and general economic gloom dogs consumers as the austerity measures hit home (quite literally).Indeed, one senior investment adviser says the knock on wider monetary impact of Lehmans' failure is quite likely to be far bigger than it would have ever cost to bail it out.

 

So, where is the mortgage market now, three years on?

 

Following two years of serious strictures, the UK and the housing market both appear to be in a slow, fragile recovery. Mortgage funding has eased over the last 12 months, with house prices stabilising and gross lending holding at around £135bn.

 

Most notably, lenders have gone to war over fixed rates recently, slashing deals on an almost daily basis as funding gets cheaper, and long-term fixes dropping to the lowest levels ever seen. There has also been an increase in high LTV mortgages, but in reality it is those with large deposits who are really feeling the love from banks that remain deeply risk averse. And this is unlikely to change as concerns grow that the industry, and economy as a whole, could face further set backs.

 

It is interesting that the third anniversary of Lehmans falls in a week when the eurozone slides ever-closer towards a Greek default and the ensuing fallout, and the much-discussed Vickers report is published.The shadow of the eurozone looms large on the financial markets, with warnings that the "contagion" of a Greek default could create a bigger banking crisis than we saw in 2008.

 

Of course, hindsight is a wonderful thing and the lessons of old seem to be getting relearned the hard way.

 

Consider that, at the height of the "no more boom and bust" bluster in 1999, US President Bill Clinton decided to repeal the 1933 Glass-Steagall Act- a set of bills designed to prevent deflation and reform the banks following the financial crisis of 1929.The repeal essentially removed the protection dividing investment and retail banks, so allowing the casino banking deplored in recent years.

 

On this side of the water, lax regulation and lending rules allowed a similar scenario to build up, with government, homeowners and the industry caught in the thrall of believing that growth (and house prices) would continue to climb forever. Now, of course, in the UK we have the Vicker's report proposing the ringfencing of bank's retail and investment divisions by 2019.

 

Does anyone else smell a (strong) waft of irony? Good old fashioned prudence really is the order of the day for everyone from banks to consumers.

 

So, what of the future?

 

The effects from Lehmans will likely be felt for the rest of the decade, with lenders managing to pay down their debts in the next few years. Meanwhile, the easing availability of funding for mortgages could rely on how the eurozone fares. The financial markets are extremely nervous and the eurozone crisis could simply reverse the recovery we have seen in wholesale funding, mortgages and the economy.

 

How much more pain we have still to come is anyone's guess and I will leave conclusions and forecasts to the experts.

 

However, banking crises are a once-in-a-century event (we hope) and happily, most of us are unlikely to be around if/when the next bankers and politicians decide less regulation is a "good thing".

 With benefit cuts and the failure of the government's Mortgage Rescue Scheme, homeowners must understand that they cannot rely on state help alone if they lose their income.

The Mortgage Rescue Scheme was intended to help 6,000 households struggling to pay their mortgage: in its first two years it has helped just 2,600. 

Not only that, but the scheme is over budget, with the average cost of each rescue reaching £93,000 compared to an expected cost of £34,000 - a burden the government can ill afford as it looks to cut costs across the board.

Given this situation, it is hugely concerning that consumers still believe they would not need to worry if they lost their income due to unemployment or sickness.

In a recent survey, it was found that a third of consumers thought they would rely on the government if their inome suddenly stopped. In light of the ongoing austerity measures, this may not be the best option as the government seeks to reduce the UK's deficit. 

With less support from the government, consumers need to ensure they have a financial contingency plan in place in case the worst happened.

In the same survey, only 11% of people claimed to have mortgage payment protection insurance and a mere 4% had income insurance; worrying figures given the current economic market. 

Yet, almost half said that they would not be able to last longer than three months on their savings alone.

This is pretty startling given the fact that the current jobseekers' allowance would only provide £270 a month, highlighting a real requirement for adequate protection. 

With our strained circumstances set to continue, mortgage payers need to be realistic about their options, ensuring they have a contingency plan in place to support them if their income suddenly stopped due to illness or redundancy.

In the current economic backdrop, consumers need quality advice more than ever.