UPDATE 1-Britain launches mortgage guarantee plan, sets out rules for banks
* Scheme designed to help homebuyers with small deposits
* Critics worry scheme could fuel new property bubble
* Lenders to pay commercial fee but will get capital relief
LONDON, Oct 8 (Reuters) - Britain launched a flagship programme to help people buy their own homes on Tuesday, offering banks the chance of providing high loan-to-value mortgages without having to set aside punitive amounts of capital.
The scheme, which allows home-buyers to put down a deposit of as little as 5 percent, has raised fears that housing prices may be heading for a new boom-bust cycle.
It was launched hours after a survey suggested British house prices rose at their fastest pace in 11 years last month.
In a sign of the breadth of concern about the plan, a cross-party committee of lawmakers warned on Tuesday that it risked raising prices rather than supply.
"Mistakes could distort the housing market or carry threats to financial stability," the Treasury Select Committee said.
RBS and Lloyds, both of which are part-owned by the government, have said they will start marketing state-backed "Help to Buy" mortgages this week. Smaller lenders Virgin Money and Aldermore have also agreed to sign up.
Other banks are considering whether to sign up.
Prime Minister David Cameron and his finance minister George Osborne brought forward the launch of the mortgage guarantee programme to this week from its original start date in January.
Under the scheme, the government will offer to guarantee up to 15 percent of the mortgage, helping people who in recent years have been unable to get on the property ladder because they lack the high deposits lenders now require.
Participating banks won't have to set aside capital to cover the state-backed portion of mortgages they offer as part of the programme, the Bank of England said.
"The guaranteed portion of the loan would be treated as an exposure to the UK government," the BoE's Prudential Regulation Authority said in a statement.
In exchange for the guarantee, the government will charge a fee of up to 0.9 percent of the loan's value. This is designed to cover any losses to the taxpayer, if borrowers default, and to comply with European Union state aid rules.
Critics believe the plan was rushed out to give the government a boost ahead of a 2015 general election, just as former Conservative prime minister Margaret Thatcher reaped the popularity of a programme to allow people to buy homes they rented from local authorities in the 1980s.
The opposition Labour party says Help to Buy will not fix the fundamental problem of low levels of housebuilding.
"Unless George Osborne acts now to build more affordable homes, as we have urged, then soaring prices risk making it even harder for first-time buyers to get on the housing ladder," said Labour lawmaker and finance spokesman Chris Leslie.
The number two at Britain's Treasury reiterated the government's defence of the plan, saying it would help people who cannot afford the big downpayments sought by banks which are still wary after the financial crisis.
"I don't think our housing market should be shut for people who aren't lucky enough to have wealthy parents who can pay their deposit, or have accumulated all the assets to pay a 25 or 30 percent deposit," Danny Alexander told BBC radio.
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