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SELL YOUR HOME QUICKLYTaxpayers to fork out for BoE’s new mortgage plan
British taxpayers will be responsible for paying for the Bank of England’s proposed plan to ease the effects of the credit crunch on the banking system. The bank announced yesterday that it will offer special bonds that are backed by the government in return for lenders’ assets. The thinking behind the plan is that lenders will be able to secure more funding with the Treasury bills as a guarantee. The government backing plays an important part, as property investors are more likely to give money if they know they’ll be able to cash in the bond to get their money back.
Taxpayers foot the bill and bear the risk
According to the Times Online, the billions of pounds the Bank of England is offering lenders is actually taxpayers’ money. The bonds are offered for up to three years, at which time the lenders have to pay it back.
Should house prices fall sharply and a lot of homeowners default on their loans, the mortgage-backed assets will fall in value, at the taxpayer’s risk. According to the Bank, any shortfall in assets will have to be covered by the lender, but if the lender gets into financial trouble, it will be the taxpayer who is left with the bill.
What about the effect on mortgage rates?
While the idea behind BoE’s plan is to reignite lending between banks, there are no guarantees. Should the plan succeed, the cost of home loans will probably fall. While this is good news for property investors and home owners alike, the reality is that government cannot force lenders to cut their mortgage rates.