Government Announces Mortgage Guarantee Plan

The UK government announced plans to guarantee interest loan payments of up to 1 billion pounds to help homeowners struggling with high mortgage rates and fears of foreclosure. The government will guarantee interest payments to banks thus allowing homeowners to postpone part of the payments by up to two years. While the exact proportion to be deferred will be worked out between the home owner and the mortgage lender, a 100% guarantee is also possible.

While talking about the mortgage guarantee plan, Prime Minister, Gordon Brown said, “Hardworking households that experience a redundancy or significant loss of income as a result of the downturn will be able to defer a proportion of their interest payments for up to two years while they get their family finances back on track.”

Britain’s eight largest lenders - who account for 70 percent of outstanding mortgages, have agreed to the plan. Lenders who agreed to the government plan include, HBOS, Royal Bank of Scotland, Nationwide Building Society, Lloyds TSB, HSBC Holdings and Barclays.

In a separate move, the government also announced that state-owned Northern Rock and Bradford and Bingley will wait for at least six months before initiating foreclosure proceedings when home owners fall back on payments.

Brown urged other “responsible banks” to adopt the same procedure.

The mortgage rescue plan comes at a time when industry figures show repossessions rising sharply. The Council of Mortgage Lenders announced Wednesday that repossessions could hit 45,000 this year. Repossessions by banks rose 12 percent in the third quarter y-o-y, as Britons struggled with a contracting economy and job losses.

As the credit squeeze continues, the government has also urged banks to step up lending to small firms and businesses. Despite the £37 billion bank rescue package, the number of mortgages approved have fallen to 32,000 in October- the lowest figure since 1999.

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