CML welcomes government guarantee commitment to new build indemnity scheme
Published: 21 November 2011
The Council of Mortgage Lenders today welcomed the promise of government backing for the new build scheme which it has been negotiating together with the Home Builders Federation.
This should mean that mortgages of up to 95% can become more widely available on new build homes. This will help buyers with only modest deposits and give a welcome boost to housing market confidence, with builders able to respond by pursuing more new build projects.
CML director general Paul Smee commented:
"This scheme is good news for home-buyers, developers and indeed the UK economy. Lenders will be able to reduce the level of deposit needed by home-buyers in the new build sector, enabling more buyers to buy and so supporting the flow of new housing development, with all its positive consequences for jobs and the economy as a whole."
UK lenders will not be compromising the quality of their lending or increasing their risk of loss through this scheme. It will, however, allow credit-worthy borrowers to obtain higher loan to value mortgages on new build properties, without requiring the level of deposit which has become usual in recent years.
It is also anticipated that lending within the scheme will attract relief on the regulatory capital that would otherwise be required on high loan-to-value lending, because of the significant mitigation of the lending risk.
Notes to editors
1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 94% of all residential mortgage lending in the UK. There are 11.2 million mortgages in the UK, with loans worth over £1.2 trillion.
2. The full details of the scheme are now being developed, but essentially it will work as follows:
- The developer will deposit cash funds to indemnify the lender, equivalent to 3.5% of the value of the property, that the lender (or its bank if it is a non-deposit taker) will hold for seven years, and on which interest will be payable. Funds will be returned to the developer at the end of the seven-year period minus a portion of any credit losses on the loans in the scheme. The scheme will have a central administrator who will enable each lender and developer to create "silos" of funds that apply between them, so that all the funds deposited by a builder with a particular lender are available to meet any of this lender’s losses on loans on this builder’s properties.
- The scheme is open to any lender and any developer, but there is no compulsion to join, and there are no specific volume targets. Both flats and houses will be included in the scheme, but it will not necessarily be available on every property and both lenders and developers will have discretion on which counter-parties they wish to work with. It will be available only on lending to the owner-occupier sector, not buy-to-let, and a cap on the maximum value of the eligible property will apply. The scheme will operate in England, but similar schemes are under consideration in Scotland and Wales.
- The government will be providing an additional guarantee of 5.5% of the value of each property included in the fund, that can be called upon in the event of losses exceeding the value of the funds held on deposit.
- Interest is payable on these funds. In the event of shortfall losses, the lender would be able to claim 95% of its loss on any property from the fund.
- All parties have an incentive for the indemnity not to be called upon in practice; lending quality is in no way compromised by its existence and all the usual FSA rules and lender practices would apply to the lending decision and the subsequent management of the mortgage.
It is very important to note that the borrower’s own liability is exactly the same as on any other mortgage. The fund does not indemnify the borrower; it simply enables them to get a mortgage for a higher proportion of the value of the property than would otherwise be available.
The borrower will still be required to repay any shortfall incurred on the property if they fail to keep up their mortgage payments and the lender is forced to take possession and sell. The only difference is that, in those cases where the borrower cannot or will not meet their liabilities, the lender will be able to offset 95% of its loss against the indemnity fund.