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UK misses chance with mortgage guarantee

PA-UK houses
By Bill Thornhill
04 Mar 2021

If the UK government is serious about reversing the trend in declining homeownership it needs to do more than the half-hearted guarantee on a narrow subset of loans announced in this week’s Budget.

The UK’s mortgage guarantee scheme, which is designed to get borrowers on the housing ladder, follows the tried and test model used for between 2013 and 2016. It will be offered to borrowers with a minimum deposit of 5% of the property’s value, guaranteeing 20% of the purchase value.

It’s better than nothing, but pretty poor compared to the fully fledged guarantee schemes, such as those operating in France and the Netherlands, the latter being more relevant as it has a similar banking system to the UK.

For a flat fee Dutch borrowers get insurance in case they have to sell their homes following unforeseen events. The borrower benefits from a substantially lower interest rate and there is a lower capital charge because the loan originator is protected against credit loss.

The problem with the UK’s scheme is that it seems to have been designed in a regulatory vacuum. The absence of any detail on capital treatment suggests a lack of consultation with banks and the Prudential Regulatory Authority.

If the UK government is serious about increasing property ownership and it wanting to make a real difference to the mortgage market, it needs to go the whole hog by taking a close look at the capital treatment of guaranteed mortgages using a fully integrated system overseen by a proper housing authority.

By Bill Thornhill
04 Mar 2021