Chancellor faces mortgage guarantee backlash

One day after George Osborne announced a wide-reaching Help to Buy housing scheme, the Chancellor faced criticism that his mortgage guarantee plan might actually make homes less affordable.

As economists warned that an increase in demand could lead to a new housing bubble, political opponents also attacked the scheme for potentially subsidising second homes for the wealthy.

To buy a house worth £100,000, the buyer would have to put down a £5,000 (5%) deposit. The Government provides a guarantee of £15,000 to make up a theoretical 20% deposit - for which the mortgage provider would have to pay a fee.

The outstanding £80,000 mortgage should then be provided by the commercial lender.

How a Government-backed mortgage might work. Credit: ITV News

As the precise details of the fee faced by a commercial lender to take part in the scheme are still unclear, some are warning that the costs might be passed on to borrowers to make the programme pay.

"There are some significant costs that have to be covered," Bernard Clarke, from the Council of Mortgage Lenders, said.

"Of course, all the costs ultimately have to be reflected in the cost of borrowing."

And independent analysts suggest an increase in demand could cause a spike in house prices rather than improving accessibility to mortgages as was intended.

"There is a risk that a lot of this will do more to push prices up rather than making things more affordable," said Paul Johnson, director of the Institute for Fiscal Studies.

Labour says there are concerns that the scheme will be used by the already wealthy to finance second homes.

"Is the Government really going to allow millionaires, who will get a tax cut averaging £100,000 in two weeks time, to then get a taxpayer guarantee if they use that money as a deposit on a house?" Shadow Chancellor Ed Balls asked in the Commons today, branding the potential loophole a "second home subsidy".

Mr Osborne's team insists that is not the plan - that in fact the Mortgage Guarantee scheme will make mortgages on homes more available for those who really need the help.

Whether that will happen exactly as the Treasury intends remains to be seen.