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Government's Help to Buy scheme kicks off early

The government has announced that the contentious Help to Buy scheme will launch next week – three months earlier than planned

The scheme, which was originally due to begin in January 2014, will now be open for applications from next week but loans will still not be paid out until January.

As part of the scheme several banks will offer mortgages of up to a maximum 95 per cent of the property’s value for new and existing homes.

Under the new scheme, house-buyers would only need a 5 per cent deposit for properties up to the value of £600,000.

The mortgage guarantee scheme is the second part of the government’s Help to Buy scheme, which was announced by the chancellor as part of the budget. It also includes an equity loan scheme.

Under the equity loan scheme, the government provides a loan of up to 20 per cent of the value of a new build home, interest free for the first five years.

Mortgage lending is around half the level it was before the economic crisis, even though mortgage rates are at their lowest for five years.

Yesterday, David Cameron told the BBC’s Andrew Marr show: ‘As prime minister I am not going to stand by while people’s aspirations to get on the housing ladder are being trashed.

‘If we don’t do this it will only be people with rich parents to help them who can get on the housing ladder - that is not fair, it is not right.’

The Help to Buy mortgage guarantee scheme will be available for three years up to January 2017.

After criticism that the scheme could spark a housing bubble, it has also been announced that it will come under review once a year. At this point the Bank could recommend raising fees for the guarantees or lowering the maximum value of property bought through the scheme if the market started to overheat.

The government needs to ensure that this is not a rushed decision

Commenting on the scheme, Nigel Morton, head of real estate at solicitors Charles Russell said: ‘It was surprising to hear the government’s proposals at their annual conference to bring the Help to Buy Scheme forward by three months. The government needs to ensure that this is not a rushed decision and that it has been fully thought through and adequate safeguards developed to avoid any risks.

‘As with any insurance contract, pricing is key. If the premium is miscalculated then either the lenders will not want to participate, or the government will be handing them a get out of jail free card. This is potentially dangerous as the government is effectively making a one way bet on the UK housing market over the next decade. In the event that the economic recovery falters during this period (or the Bank of England is forced to raise interest rates) precipitating a rise in defaults, lenders might be less inclined to show leniency over repossessions since it would be the government taking any loss and not them.

‘The government has given the Bank of England power to review the scheme every September and make recommendations concerning the pricing, upper threshold and continuity of the scheme.  It is encouraging that the Treasury have stated that they will follow these recommendations although it remains to be seen what will happen if such recommendations run contrary to the political mood of the day.’

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