Osborne Plans Mortgage-Guarantee Program to Stimulate Lending

U.K. Chancellor of the Exchequer George Osborne announced a plan to guarantee as much as 130 billion pounds ($197 billion) of new mortgages to stimulate demand from home buyers with limited cash to put down a deposit.

The government will compensate lenders for as much as 20 percent of losses incurred over the first seven years of a mortgage’s life, according to a statement on the Treasury’s website today. Lenders, who will be required to pay a fee for the guarantee, will also be liable for 5 percent of losses on the insured portion of the loan to discourage them from extending risky mortgages, the government said. The plan will start next year and run for three years.

“This will be available to lenders to help them provide more mortgages to people who can’t afford a big deposit,” Osborne told lawmakers in London today. “Using the government’s balance sheet to back these higher loan-to-value mortgages will dramatically increase their availability.”

Osborne is trying to increase the availability of loans in Britain’s 1.2 trillion-pound mortgage market after banks such as Lloyds Banking Group Plc (LLOY) made borrowers put up larger deposits after the credit crisis of 2008. The Funding for Lending plan, under which lenders can obtain funding from the Bank of England for loans to companies and individuals, has helped to reduce funding costs for banks.

Still, the number of first-time buyers in 2012 was 40 percent lower than in 2007, while the number of home sales is still about 50 percent down, the Treasury said.

Self-Financing Plan

“Current turnover rates are equivalent to houses selling, on average, once every 25 years, compared to once every 15 years before the crisis,” the Treasury said in a statement. “This trend is unlikely to be consistent with a well-functioning housing market.”

The program will apply to residential mortgages on properties valued at less than 600,000 pounds where the borrower can put up between 5 percent and 20 percent of the purchase price, Osborne said. Buy-to-let mortgages will be excluded as will borrowers re-mortgaging with the same lender.

The government plans to limit its liability to about 12 billion pounds. The program is intended to be self-financing because of the fees from lenders, the Treasury said. Those fees will be subject to regular review.

Separately, the government committed 3.5 billion pounds to help new home buyers purchase newly built properties. The government will offer loans equal to 20 percent of the value of a home to help revive the housebuilding industry,

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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