Taxpayers to fund cut-price mortgages

A revolutionary scheme to provide hundreds of thousands of struggling first-time buyers with cheap mortgages funded by taxpayers' money is to be announced this week.

Under ambitious plans to turn Britain into a nation of owner-occupiers, the Chancellor, Gordon Brown, will outline a deal struck with lenders under which couples would have to raise as little as half of the cost of homes sold on the open market.

The rest of the equity in the house would be shared by the government and the bank or building society - potentially slashing average monthly repayments on a £200,000 home by up to £372 a month.

Brown hopes Britain will shortly outstrip property ownership rates even in the US, where an essential part of the American dream is buying a home surrounded by a picket fence.

Brown told The Observer: 'It means that people who couldn't afford the full price of a home can afford the partial price, and they can gradually ramp up their stake - it's putting home ownership within the reach of thousands of people who would not be able to do so.

'This is part of our idea of helping people meet their aspirations for themselves ... there is a lot of people who feel this is beyond their grasp.'

The move, which would affect about 100,000 purchases, comes after a survey last week showing house prices in some hotspots have hit eight times the average salary. A Halifax bank report yesterday also revealed that nurses, teachers and firefighters are now unable to afford homes in nine out of 10 British towns.

The plans reflect government concerns not only over the frustration of first-time buyers but over the effect on existing householders. If new buyers cannot enter the market, selling chains will eventually grind to a halt, potentially bursting the bubble for millions more whose fortunes rely on rising property values.

Brown, Deputy Prime Minister John Prescott and Housing Minister Yvette Cooper will unveil plans this week to release more land for housebuilding, cut the costs of construction and ease the planning rules.

But the centrepiece will be the extension of 'shared equity schemes' - previously only available to buy housing association properties - to private homes. The scheme will cost hundreds of millions of pounds over three years.

'When Harold Macmillan said in the 1950s that he wanted a property-owning democracy, there was only 30 per cent of the population that owned their own homes,' said Brown. 'There are a million more home owners than there were in 1997, and we believe we can get the numbers of home owners up to nearer 75 per cent. We are probably the first government that will be able to put this asset-owning democracy into practice.'

Families buying either existing private homes or newly built homes will be eligible. They would raise mortgages for part of the cost of the property - Brown said he was considering 'different permutations' ranging from 50 to 75 per cent - with the rest of the equity split between government, the bank or potentially the housebuilding company. Buyers would pay a 'rent' of no more than 3 per cent on the part they do not own, with the option to buy the whole stake if their fortunes improve.

A couple buying a £120,000 home on a 50 per cent stake would face monthly repayments of £372 - on an average 5.5 per cent mortgage deal - plus 'rent' of another £150, totalling £522. That compares with the £746 a month to buy the same house alone. With a 75 per cent stake, the repayments would total £635.

For a £200,000 home, the total cost with a 50 per cent stake would be £871 a month against £1,243 for a conventional mortgage. An extra 300,000 people will also be helped to buy social housing through the shared equity scheme.

The perks will not be restricted to key public-sector workers and not means-tested. Banks and building societies, however, will have to distinguish deserving applicants from those simply angling to buy beyond their means.

'No mortgage lender is going to fund a deal with you if you are just doing it as a money-making scheme,' said a Treasury source. 'This will be targeting first-time buyers.'

Campaigners, however, will argue that there are better priorities for government than fuelling an overheated property market.

Adam Sampson of the housing charity Shelter said affordability was a 'real problem' that had shut substantial numbers out of home ownership. But he added: 'We are talking about subsidy being directed away from providing housing for the poorest, in favour of enabling people who very often already have adequate housing, to profit out of home ownership. We question whether it's a legitimate priority to subsidise people to acquire wealth.'

He said it also risked inflating the property bubble, with prices continuing to rise if more people were available to buy - squeezing the next wave of first-time buyers still further out of the market.

Brown, however, insisted that would not happen 'if we are increasing the supply'. Ministers will also commit to building 200,000 extra new homes this year to meet the rising demand.