Two Monetary Policy Committee veterans highlighted the potential effect of the government offering overly cheap or expensive lender fees for the mortgage guarantee scheme when it begins next January in London this morning.
Former member Kate Barker said the first part of Help to Buy, in which the government provides buyers with an equity loan, had proved very successful: “I am more sceptical about the second stage of the Help to Buy, which I do worry will tend to push prices up, partly because there is a limit to how quickly supply can respond.”
She told Mortgage Solutions much would depend on the cost of the guarantee scheme to lenders.
“If the government prices it one way it could be very helpful. If they price it another way lenders may not be very interested.”
Chancellor George Osborne also confirmed to the Treasury Select Committee this morning that the detail on the guarantee part of the Help to Buy scheme would be out within two weeks.
Barker was speaking alongside current MPC member David Miles at a Resolution Foundation summit on interest rates.
Miles dismissed pre-crisis mortgage deals as “crazy” but said Help to Buy could be more constrained: “Part of the issue of Help to Buy is the pricing of the mortgage guarantees.
“If these guarantees are offered in close to actuarially fair rates it is hard to see it causing a problem.”
Whether the guarantees were offered at such a price depended on the Treasury, he added.
According to government guidance on the second part of Help to Buy, due to commence in January 2014, lenders who take advantage of the insurance scheme will be expected to pay a commercial fee.
Whether the fee will be charged upfront and the extent to which it will change depending on the mortgage loan-to-value has not yet been confirmed.
Miles, who has been a member of the Bank of England’s key decision-making body since 2009, also argued against the assumption that a rise in the Bank base rate would trigger a rise in mortgage rates.
When the Bank rate fell mortgage rates did not drop by as much, due to the additional issue of bank funding costs, he said.
The Treasury Select Committee has previously questioned the government’s ability to come up with an accurate commercial fee which covered the risk to the country’s finances.
However, a government response published today stated the fee would be devised within European guidelines and would be subject to regular review.
