Mortgage support measures may do more harm than good

11 Downing StThere are two components to the new 'help-to-buy' scheme.

1. Newly built homes
If you want to buy a newly built home and you don't have much money for a mortgage deposit, the Government may help you.

As long as you have enough money for a 5% deposit, the Government will give you an interest-free loan for 20% of the home's value. Then you'll only have to borrow a 75% loan from the bank or building society. That may mean you can get a lower rate on your mortgage.

The Government's loan will be interest-free for five years. This offer is only available for homes that are selling for £600,000 or less.

2. New mortgage guarantee
The Government's mortgage guarantee should help a wider range of home buyers, not just for newly built homes.

The guarantee will be for loans where there is only a small deposit – also known as high LTV (loan-to-value) loans.

High LTV loans are riskier for lenders. That's because there's a greater risk they won't get their money back in the end.

So interest rates are normally higher for these loans and some home buyers have struggled to get any loan whatsoever.

The Government is now saying that it will pay up if a lender can't get all its money back from a high LTV loan – this would normally be because a sale of a home doesn't raise enough cash to pay off the loan.

This guarantee will reduce the risk for lenders, so it should mean that more potential buyers will be able to get mortgages and interest rates for High LIV loans should be lower too.

What could be possibly wrong?
So why am I not keen on this scheme? After all, more people should be able to get their foot on the housing ladder.

My concern is that the scheme's 'unintended consequences' may be more serious than many folk now realise. This has certainly been the case with the Funding for Lending scheme which has pushed down interest rates on savings accounts.

I fear that 'help-to-buy' may give an unwelcome boost to house prices. More mortgages means more buyers and more demand, pushing up prices. And that's not good news for first-time buyers.

The best way to help first-time buyers is to increase the supply of new homes which will drive down prices. I grew up in the green belt and a big part of me is reluctant to build homes on farmland, but I think it's the only way to restore sanity to our property market.

Building more homes on brownfield sites in towns and cities will help too.

For too many years, Governments supported the mortgage market through mortgage interest tax relief. Effectively that meant the Government would pay some of your mortgage interest bill. This tax relief helped to push up house prices and distorted our economy.

Economists railed against this relief year-after-year but our politicians didn't have the guts to abolish it until the late 90s.

But now we're returning to Government support for the mortgage market. I predict future chancellors will find it just as hard to remove these new support measures.

And anyway, the mortgage market is already very healthy for a large number of borrowers – they're benefitting from super-low interest rates.

Granted, it's a different story for folk with small deposits. They can struggle to get loans and often have to pay relatively high interest rates. Yes, Osborne's new scheme will help some of these people buy a home more quickly than would otherwise be the case, but it will also boost house prices. And I don't think that's in the interest of first-time buyers now or in the future.

We need more new house building and less Government support for the mortgage industry.

Budget 2013: Winners and Losers

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