UPDATE 2-Britain launches home loan guarantee plan as property prices climb
* Scheme designed to help homebuyers with small deposits
* Critics worry scheme could fuel new property bubble
* Survey shows prices rising at fastest in 11 years
* Lenders to pay commercial fee but will get capital relief
LONDON, Oct 8 (Reuters) - Britain launched a flagship scheme on Tuesday to help people get on the property ladder, defying critics who believe the state-backed mortgage programme could fuel another housing bubble.
"Help to Buy" was launched hours after a survey suggested British house prices were rising at their fastest pace in 11 years.
RBS and Lloyds, two banks in which the government retains big stakes after bailing them out during the financial crisis, will start marketing state-backed mortgages this week. HSBC, Europe's biggest bank, announced it would join the scheme later this year.
Smaller lenders Virgin Money and Aldermore have also agreed to participate. But Barclays and the British unit of Spain's Santander were still considering whether to join the programme which allows homebuyers to put down a deposit of as little as 5 percent.
In a sign of the breadth of concern, a cross-party committee of lawmakers warned the scheme risked raising prices rather than supply. "Mistakes could distort the housing market or carry threats to financial stability," the head of parliament's Treasury Committee, Andrew Tyrie, said.
When the programme was announced in March, Britain's housing market and its economy both looked in need of serious help. Now things look very different.
House prices nationally are rising at more than 6 percent a year, according to mortgage lender Halifax and parts of the capital are seeing gains in excess of 10 percent.
The government and Bank of England say there is no obvious risk of overheating, pointing to buying/selling and lending activity still well below long-term norms.
More broadly, Britain's economy is also recovering more quickly than expected. A survey on Tuesday showed British firms recorded the best growth in domestic trade for at least six years in the third quarter.
The British Chambers of Commerce said the results of its quarterly economic survey suggested economic growth sped up to around 0.9-1.0 percent in the third quarter.
Prime Minister David Cameron and his finance minister, George Osborne, trumpeted the mortgage guarantee scheme at the Conservative Party conference last week and announced it would start three months early.
Their opponents say the plan was rushed out to give the government a boost ahead of a 2015 general election, similar to the way 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.
Under the scheme, the government will offer to guarantee up to 15 percent of mortgages, helping people who in recent years have been unable to get on the property ladder because they lack the high deposits lenders now require.
Now, a deposit of five percent, could suffice on any property worth up to 600,000 pounds ($965,000).
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.
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.
The opposition Labour party said the scheme would not fix the fundamental problem of low levels of housebuilding and rising prices might make it harder for first-time buyers to get on the housing ladder.
The number two at Britain's Treasury stressed the government's case for the plan.
"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, chief secretary to the Treasury, told BBC radio.