Lloyds Bank has launched a new mortgage that does not require a deposit from first-time buyers, as long as a family member guarantees the loan by depositing money in a linked savings account.
The “Lend a Hand” mortgage will require no deposit from a first-time buyer, but a family member will have to put a lump sum into a three-year fixed rate savings account as a guarantee against the loan.
This will need to be equal to 10% of the loan and will be returned to them after three years, so long as the borrower has kept up with repayments.
The savings account pays a three-year fixed rate of 2.5% and must be opened before the mortgage completes.
The buyer will still be subject to the typical affordability criteria testing that will check their eligibility to take a mortgage and ability to pay it back.
The mortgage rate is fixed at 2.99% for three years and has a maximum term of 30 years. The maximum a buyer can borrow is £500,000 and there are no additional fees.
Vim Maru, group director, retail at Lloyds Banking Group, says: “We are committed to lending £30billion to first-time buyers by 2020 as part of our pledge to help people and communities across Britain prosper – and Lend a Hand is one of the ways we will do this.
“At the heart of this market-leading product is helping to address the biggest challenge first-time buyers face getting on to the property ladder, while rewarding loyal customers in a low rate environment.”
How does it compare?
For the guarantor:
As far as savings rates go, 2.5% is near enough market-leading rate. The best rate on the market for a three-year fixed savings account is the Al Rayan Fixed Term Deposit account at 2.52% (which pays EPR instead of APR). Gatehouse Bank pays 2.45% and is also an EPR account.
The 2.5% offered by Lloyds Bank is practically unheard of from big high street banks these days. Your deposit will be covered up to the value of £85,000 by the Financial Services Compensation Scheme (FSCS).
However, either borrower or guarantor must be a Club Lloyds member. This means opening a current account with the bank and either paying a £3 monthly fee or paying in at least £1,500 a month.
For the borrower:
The lack of fees makes the mortgage an attractive proposition for a first-time buyer, and the rate, while a little higher than the best buy, is attractive too.
The £500,00 maximum however could irk some borrowers in the capital, where sky-high prices mean many first-time buyers will need to borrower more than this. The mortgage also cannot be used to buy new-build properties.
Andrew Hagger, financial commentator from Moneycomms, also notes a potentially big problem that the mortgage can cause for the buyer, especially under current uncertain property market conditions.
He says: “If house prices stay frozen at their current level, then after three years of repayments (on a 30-year mortgage) the borrower will be left needing a 93.5% Loan-to-value (LTV) mortgage come 2022.
“You would hope that Lloyds Bank would provide a follow-on product for such customers with such a high LTV and not leave them trapped and with no other option of moving on to Lloyds Bank standard variable rate (SVR) which is currently 4.24% and could well be higher if rates rise in the next 36 months.”
“For someone with a £150k mortgage (30 years) having to move from 2.99% to 4.24% (SVR) after 3 years would see monthly repayments jump from £630 to £725 per month.”
Lloyds is not the first bank to offer such a product. An alternative would be the Barclays Family Springboard Mortgage which works under a similar arrangement.