The Lloyds Banking Group has joined the select little band that are offering new products to help first time buyers get a foot on the housing ladder.
Most people recognise that with house prices still as high as they are and mortgage requirements still very tight, saving for a deposit can take you into your late thirties so stifling the housing market.
The coalition government has asked for lenders to help and so far only two of them will offer 95% mortgages, Yorkshire Bank and Skipton Building Society through its estate agent subsidiary Connells.
Lloyds offers its 'Lend a Hand' scheme, which has been around for a while. This scheme offers a 95% loan to value (LTV) mortgage but also requires a 'helper' (friend/family) to put the equivalent of 20% of the purchase price into a Lloyds special account as a security, a sort of virtual deposit. The new bit is that the scheme has now been widened out so that local councils can put up the 20% lump sum and get 4.25% return. So far 15 councils have joined 'Local Lend a Hand', which was the brain-child of Sector Treasury Services (Capita Group) who will earn commission on every mortgage put through.
The purchasers put up 5%, a 'helper' passes the bank 20% and the buyers then make repayments on a 3 year fixed rate 95% mortgage. Once the loan to value has dropped to 90% and 42 months (three and a half years) has elapsed – whichever comes latest – the 'helper' can get their deposit back (subject to valuation and LTV evaluation) having earned 4% AER gross for the first 42 months. After those 42 months it switches to 0.5% under the Bank of England base rate. Borrowers can, subject to status, get from Â£25,000 to Â£350,000.
So the risk to the bank is that of a 75% LTV mortgage allowing them to offer favourable rates and the buyers get full title to the purchased property (no shared ownership to clutter the picture).
Should the buyer default on payments the deposited money is dipped into by the lender.
But although this helps buyers, it only helps those with sufficient income to support a 95% LTV mortgage. One also assumes that council funding will be limited and tightly controlled as will property types allowed (as in shared equity schemes). There is also the matter of the return on the council's investment which, at 4.25%, is possibly low compared to the risks they are taking. There is also the matter of how long it will take to get the LTV to 90% or below as any gains the councils make on the deposit will almost certainly be wiped out as time goes beyond the first 42 months.
Should this scheme also only be offered to those who can prove that they and their immediate family do not have the wherewithal to help and provide the full 25%?
This product will though help the government and banks keep property prices up as the housing market continues to hoover up more of the peoples' money.
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