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Osborne's Help to Buy scheme might boost the property market but it must be ditched, King warns

There is 'no place in the long run' for the Chancellor's mortgage guarantee scheme, Sir Mervyn King has warned.

The outgoing governor of the Bank of England says that George Osborne's plan to boost the housing market is in danger of replicating mistakes made in the U.S. mortgage market.

The scheme, part of the Government's Help to Buy plans, will see the state guarantee up to 15 per cent of a mortgage on properties worth up to £600,000 from next year. King said that was 'too close for comfort' to a general state guarantee for mortgages.

Job done: Sir Mervyn King will soon give way as Governor of the Bank of England.

It is due to run for three years starting from next January and Sir Mervyn warned it must not be allowed to become permanent.

The other aspect Help to Buy, which launched last month, sees interest-free equity loans of up top 20 per cent be provided to people buying new-build properties so they only have to raise a 5 per cent deposit to get a 75 per cent mortgage.

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In an interview broadcast on Sky News' Murnaghan programme today, Sir Mervyn said: 'I'm sure that there is no place in the long run for a scheme of this kind.

'This scheme is a little too close for comfort to a general scheme to guarantee mortgages. We had a very healthy mortgage market with competing lenders attracting borrowers before the crisis, and we need to get back to that healthy mortgage market.

'We do not want what the United States have, which is a government-guaranteed mortgage market, and they are desperately trying to find a way out of that position.

THE TWO FORMS OF HELP TO BUY

There are two aspects of the Help to Buy scheme: the first is 'equity loans' the Government provides to new or existing homeowners to buy new-build homes.

This will mean they only have to raise just a 5 per cent deposit to get a 75 per cent loan-to-value mortgage, with the Government stumping up the rest through an interest free loan. These have been available since last month.

The Government is also running a £12billion mortgage guarantee scheme designed to encourage mortgage lenders to offer up to £130billion-worth of high loan-to-value mortgages.

It will be providing guarantees of up to 15 per cent on homes worth less than £600,000. It is set to be introduced in January 2014.

'So, we mustn't let this scheme turn into a permanent scheme. Now when is the right time to terminate it will depend on economic conditions at the time.'Sir Mervyn said the economy was in a 'modest recovery' but 'we certainly can't be satisfied with it'.

'We will need to do more to use up the spare capacity, and to get back to a healthy, growing economy,' he said. 'But we are in a recovery period now, I think, yes.'

Sir Mervyn's concerns about Help to Buy echo those of the Treasury Select Committee, which reported on the Budget last month.

The committee warned the Government will come under 'immense' pressure to extend Help to Buy in three years time.

It said: 'The unintended and unwelcome outcome could well be that a scheme designed to deal with a supposedly temporary problem in the UK housing market becomes a permanent feature of the UK housing market.'

 

Help to Buy consists of two elements, an 'equity loan' scheme and the mortgage guarantee.

Under the equity loan new or existing homeowners will need to raise a deposit of 5 per cent of the value of the property they want to buy, but can borrow up to a further 20 per cent from the Government on an interest-free basis. The biggest loan available will be £120,000.

You can watch the full interview with Sir Mervyn on Murnaghan on Sky News on Sunday from 10am.

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