Brown’s cheap mortgages plan

Thousands of people who had given up on getting on to the property ladder were given renewed hope by Gordon Brown this week as he unveiled proposals to help first-time buyers.

But critics say the scheme would not help provide housing for the poorest, and that unless the plans go hand in hand with an increase in housing supply, would risk fuelling price rises.

“Far from being a boon to those in need, it is actually an encouragement to invest in an already inflated asset class, which could have disastrous longer-term effects on the housing market and in particular first-time buyers,” says Dan Kemp, senior fund research analyst at Christows stockbrokers.

The proposed scheme would enable first-time buyers to buy a property with a mortgage for just half its purchase cost, under a deal struck between the government and mortgage lenders. The rest of the equity in the property would be shared between the government and the bank or building society, with the government bearing the brunt of any losses.

Similar schemes have been run through housing associationsin parts of the North, but the chancellor’s programme – which would help up to 100,000 people over the course of the parliament – would apply to any property bought on the open market. The scheme is also not restricted to the key public sector workers – banks and building societies will have to sift out deserving applicants whose salaries do not stretch to the average-priced house from those merely angling to buy dream homes beyond their means.

The news comes after a recent report from the Halifax that said key workers are beingincreasingly priced out of the housing market. It found that average properties were beyond the reach of nurses and firefighters in nine out of ten10 towns across Britain and beyond teachers and police officers in almost eight out of ten10.

Given the pace at which the affordability gap has been widening, it is not surprising that the government should seek to respond. But experts point out that the measures are little more than a gesture, saying the low number of loans likely to be available was nowhere near enough to have any real effect.

Simon Ward, investment strategist for fund management group New Star, says the scheme is small relative to the size of the housing market as a whole. “It is unlikely to have a major impact on housing market trends, since the sums involved are relatively small: the mooted £1bn in public funds over five years compares with annual mortgage lending growth to about £100bn.”

Sue Anderson, of the Council of Mortgage Lenders, which has been involved in the development of the scheme, says it was a very positive step but adds: “We have got to see more housing supply accompanying this, otherwise there is the risk that all you do is push up house prices further. At the moment we are trailing way behind demand in terms of housing supply.”

The National Housing Federation also says that the scheme is not the answer on its own. “The government’s commitment to affordable home ownership is heartening, but mortgage subsidies are not a substitute for more investment in new homes,” says Danny Friedman, director of policy at the National Housing Federation.

“The government needs to tackle a range of housing problems. With 100,000 families homeless and in temporary accommodation and a government pledge to reduce that number by half by 2010, it is vital that there is no substantial diversion of public funds away from building new affordable rented homes.”

The CML said that a large number of mortgage providers have expressed an interest in getting involved in the scheme but that they are waiting until September when the government publishes its findings before signing up.

“The chancellor will need to lay down clear guidelines on how the scheme can be policed and marketed to ensure that it is utilised by genuine and deserving first- time buyersIt is not enough to leave it to the discretion of banks and building societies,” says Peter Gladdy, director of Mortgages Direct. “Shared ownership initiatives are often perceived as being too complex, which will deter many buyers and lenders.”

Options already available to first-time buyers include the Guarantor mortgage, offered by Northern Rock, and the Portman and Nationwide, where a parent promises to cover the monthly loan repayment if the buyer runs into financial problems.Alternatively HSBC has the HomeStart mortgage where the repayments for the first three years are on an interest-only basis and revert to a repayment mortgage for the remaining term.

There is clearly a problem with the affordability of housing in large areas of the UK but there are also clear reservations about whether Brown’s scheme is the best way to rectify the situationsolution. Many banks fear the scheme could essentiallybe seen as little more than a “quick fix” unless it is part of a package designed to tackling wider problems in the housing market.