Monday, 21 November 2011

Taxpayer in hock to First Time Buyers

Today's promise from the government that it will guarantee the mortgages of First Time Buyers raises the question : at what point would taxpayer money be lost?

By the way, remember this Mortgage Indemnity Guarantee, masterminded by the Home Builders Federation and the Council of Mortgage Lenders, will also be open to existing owners who want to move but can't afford more than a 5% deposit.

Here are the details, but in summary the...

Homebuyer can get a 95% mortgage on a new home, because...
Housebuilder guarantees 3.5% of the price,
Taxpayer guarantees 5.5%,
Buyer puts up a 5% deposit.

For there to be a call on the taxpayer guarantee, first there has to be a default.

Plenty of people carry on servicing their mortgages, even though the value of the home has fallen and put them in negative equity. If there is negative equity, the taxpayer is in danger, but doesn't have to stump up any cash.

Next, the deposit has to be eliminated - a 5% shortfall in the price.

Then, the builder's stake of 3.5%, before there is a call on the taxpayer.

So what you'd need, in theory, would be a default and drop in value of more than 8.5%.

Of course, if the price of one home falls, others will drop as well. So if one buyer defaults it's likely that many others will be in the same dire position. The cost for the taxpayer would multiply.

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