The scheme gives a government guarantee to buyers with a small deposit saved up, making banks more willing to lend and increasing the range of mortgages on offer.
But the scheme could also artificially push up house prices, with the Council of Mortgage Lenders (CML) warning more building is needed.
“There has been no year in the last decade or more in which the rate of construction has met the estimated growth in demand,” the bank and building society group said.
“The annual supply of new housing currently adds considerably less than one per cent to the housing stock – so even measures with the potential to increase new supply significantly can have only a very small impact in the short term on housing need and costs.”
Loans are now available from RBS and NatWest, as well as Lloyds’ Halifax brand. HSBC will join later this year. Virgin Money and Aldermore will offer loans under the scheme in the New Year, when the guarantees were originally intended to start before the chancellor brought it forwards.
In exchange for the guarantees, the banks – and so the borrowers – will pay a fee. For borrowers with a deposit of five to 10 per cent, that will be 0.9 per cent of the loan. For those with 10 to 15 per cent it will be 0.46 per cent, a for those with a deposit of 15 to 20 per cent it will be 0.28 per cent.
The guarantee means the government covers losses on up to 15 per cent of the mortgage, for the first seven years of the loan.
The banks which sign up to give loans in any one of those three loan-to-value brackets must commit to putting all loans of that size through the scheme, to avoid the Treasury being left only with bad loans and the banks taking the best quality mortgages.
And the lenders must apply tougher tests to borrowers to make sure they can afford the loans, including checking they can afford payments when interest rates rise in several years’ time.
HOW THE SCHEME WORKS
Banks pay the government for a guarantee. If the customer defaults on their mortgage, the government covers almost all of the guaranteed portion.
This guaranteed portion will be up to 15 per cent of the mortgage. In the event of a default, the Treasury will refund the banks for almost all of portion.
The scheme is split into three tranches: 90 to 95 per cent mortgages; 85 to 90 per cent; and 80 to 85 per cent.
The fee varies for each, at 0.9 per cent of the loan at the top end, 0.46 per cent in the middle and 0.28 per cent at the bottom end.
It is expected that the fees cover the cost of the scheme and defaults exactly, leaving the Treasury with no profit or loss. If it looks like that break-even point will be missed, the Treasury can raise or cut the fee to match.
When banks sign up to offer loans with the scheme for any one or more of the tranches, all loans at the relevant loan to value ratio must go through the scheme.
That is to avoid what banks choosing to keep the best quality loans for themselves, leaving the Treasury only guaranteeing the worst mortgages.
The banks do get some cost relief when they make these loans. Instead of facing a hefty capital requirement charge for issuing risky, high loan-to-value mortgages, the government guarantee means they are treated as relatively safe and so cost less.
The guarantee lasts for the first seven years of the mortgage. After that the expectation is the borrower will have built up equity in the home and no longer need the support of the guarantee.