Taxpayer to carry the risk for private mortgages

The taxpayer is to become the ultimate guarantor for hundreds of millions of pounds of mortgages as part of a radical strategy to boost Britain's ailing housing industry.

Under plans to be unveiled by David Cameron and Nick Clegg today, the Government will underwrite a proportion of mortgages for newly built homes – the first time any such scheme has been attempted in the UK.

By taking on some of the risk of lending, the Government hopes to bring down deposits of up to 20 per cent for first-time buyers to as little as 5 per cent, and to kick-start demand for homes. But, if the housing market were to suffer significant falls in the future, the taxpayer could become liable for losses on repossessed homes.

As part of a three-pronged approach to tackle Britain's housing crisis, housing developers will also be able to bid for up to £400m of government subsidies to start work building on land which they already own but consider currently uneconomical. A further half a billion pounds will be available to local authorities to create the infrastructure necessary to support new developments, while changes will also be made to encourage tenants to buy their council houses.

The proposals are the first of a package of measures to be announced in the run-up to George Osborne's autumn Budget statement, designed to boost growth by spending more on large infrastructure projects.

While the Chancellor will continue to insist that the initiatives do not constitute a '"Plan B" for the economy, they show how concerned the Government is at sluggish growth and rising unemployment. The Office for Budget Responsibility is likely significantly to downgrade its growth forecasts at the time of the autumn statement.

The Government will underwrite a small percentage of each loan on newly built property. Banks are typically demanding a deposit of 20 per cent on loans to first-time buyers and, by guaranteeing a portion of the loan, the Government will in effect be shifting that "loan-to-value" ratio so that the borrower needs a smaller deposit – possibly as little as 5 per cent. That, it hopes, will lead to more demand and provide a boost to the construction industry in terms of sales and employment.

The state would not be first in line in the event of a default. Instead, homeowners would still lose their deposits before the Government suffered losses, which would be shared with the lender.

Mr Cameron will also announce a new £400m building fund which he hopes will kick-start the construction of up to 16,000 homes and support 32,000 jobs.

Speaking to The Independent, the Housing minister, Grant Shapps, said the measures would tackle decades of under-investment in housing. "The problem we have at the moment is that lenders won't lend, builders won't build and buyers won't buy," said Mr Shapps. In the past, governments have attempted to tackle either the supply side or the demand side. This time we are going to put in place a strategy for both."

Steve Turner of the National Housing Federation said the mortgage indemnity scheme would be a "game changer". "We have been pushing the Government very hard on this as we believe it is the one single thing that would make the most difference to the housing market. If buyers can get a loan of up to 95 per cent of value we know that demand is there. That in turn will make it economical for house builders to kick-start developments."

Alongside plans for the private sector, ministers are also expected to announce details of changes to the right-to-buy scheme on council houses. These are likely to include raising the cap on how big a discount tenants can get if they buy their home.

The plans: how they work

* Mortgages for newly built homes will be partially underwritten by the taxpayer to reduce deposits. But it remains to be seen if the banks will co-operate when the economic outlook is still so shaky.

* A new £400m "Get Britain Building" fund will subsidise the construction costs of up to 16,000 homes. The question is whether the Government could end up subsidising developers to build houses they were going to construct anyway.

* Increasing the incentives for council tenants to buy their own homes could lead to the decimation of council housing stock.