Stuart Heathcote and his wife never intended to buy a house this year. Then the British government offered an incentive that changed their minds: a no-money-down mortgage. It was the head start they needed to sign a contract for a £135,000 (€147,000) three-bedroom house near Birmingham. Stuart, who works for the NHS, and his wife plan to move in before the end of January.

Easy credit is back in the UK, and this time the government and home-builders are making the loans. Seeking to recover from the worst recession in a generation, Britain is helping as many as 10,000 buyers obtain 100% financing through a £300m plan called HomeBuy Direct at a time when mortgages are scarce and, according to Ernst & Young LLC, home prices will "stagnate" for at least two more years.

"It's a catastrophe waiting to happen," Robin Hardy, a home-building analyst at KBC Peel Hunt, said of the plan. "If the only way a certain bit of the market can work is to lend deposits, those people can't afford a house. It's being done for the industry and not for the first-time buyers."

More than 32,000 buyers have sought information about the loans, a sign that borrowers aren't scared off by a house price drop accompanied by rising foreclosures and defaults on high percentage loans that outstripped values. There are currently no plans to expand the plan.

Britain's builders have also embraced HomeBuy Direct to revive sales. Barratt Developments, Persimmon, Miller Group and Redrow are offering a combined 7,000 homes through the plan, according to the companies.

"Generally, it has been very good for the industry," said Chris Millington, a house-building analyst at Numis Securities in London. "It removes one of the main problems in the market and helps the new buyer. It has been quite a decent success."

The financial crisis forced every major UK mortgage provider to stop making loans for 100% or more of a home's value by April 2008. House prices will fall about 30% from their October 2007 peak, Fitch Ratings said last week, confirming an earlier forecast. Prices are currently down 13% from that level, Fitch said.

When property prices decline, homeowners with higher percentage mortgages are more likely to fall into negative equity, where the loan is greater than the value of the house. More than 270,000 mortgages were in arrears for longer than three months as of the end of June, according to the Council of Mortgage Lenders. That's the highest level since June 1997.

"One hundred percent loan-to-value mortgages were what partly got us into this mess in the first place," said Paul Guest, head of research for Europe, the Middle East and Africa at Jones Lang LaSalle. "I would be concerned with the message this sends to borrowers."

To qualify for HomeBuy Direct, borrowers must have a good credit history, no rent arrears and no breaches of their rental agreement, according to the government brochure for borrowers. It didn't cite a specific credit score needed to qualify.

The loans are interest-free for the first five years before starting at 1.75% and rising annually by a level linked to inflation. The plan reduces the chance of negative equity because the amount owed to the government and developer will fall if the value of the home declines. If the property's value has increased when it's sold, the state and homebuilder will share in the profit based on the size of the loan.

"HomeBuy Direct is giving thousands of first-time buyers the chance to step onto the property ladder," according to Communities and Local Government, the department overseeing the programme. "This is not a 100% mortgage: the buyer gets a mortgage for up to 70% of the property's value. The remaining 30% is made up by an equity loan, co-funded on equal terms by government and house-builder, and free of charge for the first five years."

The plan convinced Heathcote, a 33-year-old IT specialist, to buy a house rather than rent. He and his wife, who together earn about £40,000 a year, chose a house in a development called The Keep built by Persimmon.

"We didn't have any desire to buy really," said Heathcote. "Five years down the line, we might have been able to put down a deposit for a place, so this is like a head start."

KBC's Hardy, who has over a decade of experience with the British building industry, said the programme is burdensome for homeowners. A first-time buyer of a £130,000 home under the plan would have to save about £650 a month on top of mortgage payments to pay off a 30% loan of £39,000 pounds in five years, he said.

"Every scheme in history the government has tried to implement in the housing market has gone completely toes-up," said Alastair Stewart, a London-based analyst at Investec Securities. "It perpetuates the high prices. The best way to increase demand is to let homes fall back to their natural prices."

British builders are calling the plan a success and some have initiated their own lending plans, such as Barratt's Head Start, Bovis Homes' Jumpstart and Taylor Wimpey's Easystart.

"HomeBuy Direct has now got real momentum," Mark Clare, chief executive of Barratt, said in a conference call last month. "It's really beneficial for the first-time buyers and a low-cost way to ensure other people can participate in the market."

Around 800 properties have been bought or are close to being purchased through the plan, Clare said.

"It's an excellent move by the government," Keith Miller, chief executive of Miller, Britain's largest closely-held home-builder, said in an interview. "In times like these, it helps to get the bottom end of the market moving, and these people are very carefully qualified."

Around a quarter of Persimmon's sales and a fifth of Barratt's came from shared equity plans in the first six months of the year, the firms said.

Kirsten Johnston, 30, was accepted for a HomeBuy Direct loan, then withdrew from the plan after two banks turned her down for a mortgage. Johnston, who works for RWE npower, a gas and electricity supplier, said she was unable to persuade the second lender, Royal Bank of Scotland, that a county court judgment on her credit record should have been removed in 2007.

Johnston and her sister, who have combined income of £40,000, had planned to buy a £175,000 house at the Windsor Heights development in Redditch, central England.

"Although these banks say they've bought into the scheme, they don't want to deal with shared equity arrangements, so they're making life difficult," she said. "I intend to move in with my sister and save hard for a deposit. I gather that some banks will do 95% mortgages."

The number of British loans for house purchases rose 24% in July from the previous month to 56,000, according to the Council of Mortgage Lenders. Still, the Bank of England's data on mortgages show the number of approvals is less than half the total in the same month two years ago.

Rachael Waring, an analyst at Panmure Gordon in Liverpool, said the government plan isn't simply a return to the no-deposit lending of the past.

"They are borrowing their deposit, but at more attractive rates and with the government security behind them, so it's not as disastrous as a traditional 100% mortgage," she said.

HomeBuy Direct loans will be available until the end of March. By then, the Heathcotes should be in their new home in Darlaston, about 16km from Birmingham.