Local councils to offer first-time buyer mortgage support
Fifteen local authorities team up with Lloyds TSB in a scheme to top-up first-time buyers’ deposits
First-time buyers who are unable to call on the bank of mum and dad to boost their deposit may now be able to turn to their local council instead.
Fifteen local authorities, including East Lothian, Blackpool, Newcastle-under-Lyme and Warrington, have agreed to put money in a Lloyds TSB scheme to top up the deposits of first-time buyers trying to buy a home in their area. The scheme, called Local Lend a Hand, allows first-timers to buy a home with a deposit of as little as 5%.
Raising a deposit is one of the biggest hurdles for first-time buyers since the 2007 banking crisis, with many lenders refusing mortgages to those whose savings are less than 20% of the value of the property they want to buy, and offering the lowest rates to those with deposits of 25% or more. The requirement for a big deposit has relaxed recently with more lenders willing to provide mortgages worth 90% of a property’s value, but only two – Yorkshire Bank and Skipton building society, via its estate agency subsidiary Connells – will lend up to 95%.
The need for a big deposit combined with high house prices and higher rates of unemployment among younger people combined to push down the number of first-time buyers by 13% in the 12 months to January, according to the Council of Mortgage Lenders. First-time buyers are recognised as the driving force behind house price increases, and earlier this month the Nationwide building society admitted this low number was “casting a shadow” over the housing market.
Lloyds TSB already offers a mortgage which lets parents boost the size of their children’s deposit, but until now prospective buyers without wealthy parents to fall back on have had to build up their own savings. The average first-time buyer deposit in 2010 was £28,489, according to the Halifax.
Stephen Noakes, commercial director of mortgages at Lloyds TSB, said: “Helping people to buy their first home is crucial in achieving and maintaining a sustainable housing market. With Local Lend a Hand we are taking our existing Lend a Hand product to another level and addressing the real challenges first-time buyers face.”
Buyers will have to pay interest on the full amount borrowed, including the local authority loan, but will benefit from slightly lower interest rates than they would normally pay for a 90% loan: a loan being set up now would cost 5.09% with a £895 fee or 5.79% with no fee fixed for three years, compared to 5.99% with a £895 fee fixed for three years.
Although Lloyds TSB is willing to lend from £25,000 up to £350,000 per property, local authorities may set lower maximums depending on the amount they want to put into the scheme and the price of typical first-time buyer properties in their area. The buyer must put down a deposit of at least 5% and the local authority will provide a cash-backed indemnity of up to 20%. Unlike shared ownership, the buyer will own the whole property.
Buying homes, buying time
East Lothian council has agreed to put £1m into the scheme. Councillor Stuart Currie said he hoped that helping more people buy their first home would reduce the waiting list for council homes – which has 4,000 people on it – and buy the authority time while it builds more social housing.
“The typical one-bed first-time buyer property here costs between £80,000 and £100,000, so you would [normally] need a £25,000 deposit. That’s a big deposit to build up.” he said.
A repayment loan for £95,000 through the Local Lend a Hand scheme is likely to cost about £566 at the lower 5.09% rate, and £618 at the higher 5.79% rate.
The interest rate of 4.25% paid to local authorities on money deposited in the scheme is about the same or slightly more than they would earn in a standard bank account, but they will carry most of the risk of loss should properties fall into negative equity or the borrower defaults on his or her loan.
Paul Campbell, a councillor with Warrington council, said normal checks would be conducted on prospective borrowers by the lender, and the risk of default to the council’s proposed investment of £5m has been calculated at just 0.3%, or £15,000 over five years. “We hope the money will help 250 people on to the housing ladder, which in turn would release other people to buy bigger homes and boost the local economy,” he said.
Housing minister Grant Shapps called a summit of mortgage lenders in February to discuss the issues preventing first-time buyers securing their own homes, and what could be done to help them. He said: “I am delighted to see that those on the front line of building homes and providing mortgages are stepping up their efforts to help aspiring first-time buyers get a foot on the ladder.
“These new and innovative mortgage products are welcome because they are tailored to meet the challenges faced by first-time buyers, and can help get the housing market moving again.”
The idea for extending the scheme was developed by Sector Treasury Services, part of the Capita Group, which will be paid commission for each Local Lend a Hand scheme borrowed.
Source: Guardian.co.uk (16/03/2011)