The scheme was announced in the much-awaited housing strategy last week but it will only help a few people, the expert warned.
Prime Minister David Cameron called the housing strategy "radical and unashamedly ambitious", but the mortgage indemnity scheme was described as "toxic" at a recent industry event.
The housing strategy outlined the scheme as an opportunity to support up to 100,000 first-time buyers buy a new home with the availability of up to a 95% loan to value mortgages for new build properties.
However, a housing expert has warned that this headline strategy will not help many people.
"The chancellor says that this will help 100,000 families to buy new-build homes and flats. This will only help those families who are secure in their jobs and have the courage in this market to obtain mortgage finance," said Anne Bowden, a property and housing expert at Pinsent Masons, the law firm behind Out-Law.com.
Under the scheme housebuilders will deposit 3.5% of the sale price in an indemnity fund for each home sold through the scheme for seven years. Interest is payable on the money. The Government will provide a guarantee of 5.5% of the property value that can be called on if any losses by defaulting buyers exceed the developer's 3.5%.
London mayoral candidate, Brian Paddick and recruitment entrepreneur and television personality James Caan criticised the mortgage indemnity scheme at a Movers & Shakers breakfast debate today. They claimed that the scheme could see thousands of people lose their homes in the future as interest rates rise.
They pointed out that interest rates are at an historic low and therefore new homes are at their most affordable. Encouraging buyers to take on debt that they can barely afford now could cause trouble for borrowers and the housing market when interest rates rise.
