MORTGAGE borrowers who use the government’s new guarantee scheme could see interest rates fall by up to one percentage point, City A.M. understands.
Banks lending under the scheme will have to pay the government a fee for each mortgage given out, a cost that will be passed on to borrowers. But the fee will only cost around one-third of the likely gain for subsidised borrowers.
The scheme will give borrowers with as little as a five per cent deposit for their house a guarantee covering up to the next 15 per cent. As a result the lender should present a lower risk to the bank or building society.
However the banks cannot treat the borrower in exactly the same way, as they will not have a track record of saving up for the larger deposit, and because the bank has to pay the government a fee for the guarantee – to cover the risk of paying out on a defaulting mortgage and to cover the admin costs.
As a result, insiders at the lenders expect a borrower with a five per cent deposit plus 15 per cent guarantee to pay the interest rate typically faced by a borrower with a 10 per cent deposit.
On a £200,000 property that could cut the rate on a two year fix from around 4.6 per cent to around 3.6 per cent.
Similarly a typical borrower with a 10 per cent deposit and 10 per cent guarantee will pay the same rate as a borrower with a 15 per cent deposit.
However the banks cannot be certain as to the effect – they had expected the scheme to be rolled out in January, but instead the government is expected to launch it this week. As a result Barclays, HSBC and the Nationwide are all considering whether they will take part.
RBS and Halifax will take part.