Low-deposit mortgages make a comeback
Lloyds TSB has launched a competitive first-time buyer mortgage that requires a deposit of just 5%.
The ‘Lend a Hand’ mortgage offers borrowers the chance to get on the ladder (even if they need to borrow 95% of a property’s value, or loan to value) at the kind of rates usually reserved for those with large deposits. The deal is possible because the mortgage has a linked savings requirement.
The three-year loan is linked to a savings account, into which the buyer’s parents, grandparents or friends must deposit 20% of the property's value. Lloyds then has a charge over this cash. The money will be tied up for the full three-year term of the loan, earning a fixed interest rate of 3.5%.
This deal has been hailed as a lifeline for first-time buyers as it attracts an interest rate of 4.39%. This kind of rate is usually associated with 70% mortgages, and compares to an average rate of 5.98% for 90% mortgages.
Stephen Noakes, commercial director of mortgages at Lloyds Banking Group, says: “The legal charge on the parents' savings account means we can offset the risk of lending at this level to offer a realistic and affordable option for first-time buyers.”
Mortgage brokers have welcomed the new deal. Sally Laker, managing director of Mortgage Intelligence, says: “It’s a really good idea. There’s nothing else like this on the market at the moment. It’s also great for the lender because it gives Lloyds access to retail funds, which are so desperately needed at the moment.”
The 'Lend a Hand' mortgage is potentially a useful solution for parents, because it allows them to help their offspring onto the ladder without having to stump up the cash for a deposit and tie it up in bricks and motor. According to Lloyds, 20% of parents have already used their savings to help children get on the property ladder, with a further 45% stating that they are keen to do something to help.
Andrew Montlake, director of mortgage broker Coreco, says: “What's clever about this product is that you can raid the Bank of Mum and Dad without leaving them high and dry - it's about using capital rather than using it up.”
At the end of the period, if the house has at least held its value, and repayments have reduced the mortgage from 95% to 90% loan to value, then money in the savings account can be freed up, and the buyer can remortgage onto any other product in the market.
Laker says: “This is a step forward from guarantor mortgages, or products which put a legal charge on the parent’s home, which could entwine parents in their children’s finances for the foreseeable future.”
However, the downside to this product is that parents must be prepared to tie up their money for at least three years. While their money will earn a fairly competitive annual interest rate of 3.5%, this might not look like such a hot savings rate down the line.
“One thing parents have to consider is the possibility that interest rates rise during these three years,” says Laker. “If rates increase to 6% or 7%, they would miss out on potential returns. It’s difficult to predict when interest rates will rise, and by how much, but this is something they need to think about.”
In addition, if the property’s value falls or stays static, then parents may not see their money after the three-year period ends. A Lloyds TSB spokeswoman says: “House prices are expected to rise again within the next couple of years, and that taken with repayments means that the vast majority of people should see loans fall below 90%.
"However, if they don’t, the legal charge over the savings account will remain and they will remortgage onto this product again.”
Despite these drawbacks, Laker expects this mortgage to be popular: “I think other lenders will be looking at offering something like this deal. They’ll be interested in anything that brings retail funds into the business.”
Last week Alliance & Leicester launched a first-time buyer mortgage available up to 85% loan to value.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
These are mortgages to help first-time buyers get on the housing ladder whereby parents or relations stand as security for the loan by guaranteeing to pay the mortgage in the event of the purchaser failing to make the repayments. The guarantor mortgage is taken out in the purchaser’s name, but the guarantor’s income is used to guarantee the mortgage borrowing but this enables the first-time buyer to borrow more money than his or her own income as the guarantor’s income (less any other financial commitments) is also taken into account.