Kate Hughes: The 'take generation' ought to be able to save for their own deposits
There's a catch to this 95% mortgage. But it's still a good sign that the banks are beginning to think differently about helping first-time buyers
Sunday 24 May 2009
Please don't hurt me. I'm about to praise a bank for its mortgage. Lloyds TSB launched a first-time-buyer's loan offer last week that has sent financial experts scurrying to predict the return to health of the mortgage market, despite news last week of a further slump in mortgage lending levels.
The three-year deal, called Lend a Hand, offers first-time buyers a 95 per cent loan-to-value mortgage at 4.39 per cent by taking a legal charge on a savings account belonging to their parents. So there's a lot going on there. First, the rate is better than the typical rate for 90 per cent mortgages at 5.98 per cent. Second, it's a 95 per cent mortgage, and we haven't seen many of those for a while. And then there's this parent bit, and the cynical among us would be looking for the catch here. The legal charge means parents retain ownership of their savings – at a decent rate of 3.5 per cent, though the best buy for a three-year savings product is currently around 4.35 per cent from ICICI Bank. At the end of the three years, if the combination of repayments and rising house prices has moved the mortgage from 95 per cent to 90 per cent LTV, the legal charge on the savings account can be removed and the first-time buyer can operate the mortgage account independently.
As you can imagine, mortgage commentators who have spent the past year complaining about the banks' responses to the credit crunch are loving it. "Product innovation such as this deal from Lloyds TSB will give a much-needed shot in the arm to the first-time-buyer market," says Andrew Hagger of Moneynet. "An increase in FTB activity can only have a positive knock-on effect further up the property chain."
"Not only is the rate competitive, but it's really good to see some new activity in the high loan-to-value market," says Clare Francis of moneysupermarket.com. "It is another indication that funding pressures on lenders may, at last, be starting to ease. We need products like this to help to kick-start the housing market, as the absence of first-time buyers has been one of the main factors blamed for the severity of the downturn."
Yes, it's a great way to help to loosen up the market by encouraging the first stage in the conveyor belt to get involved again. And yes, it's a great way for parents to help out – in fact, 70 per cent of parents would like to help their first-time-buyer kids.
But we're not out of the economic woods yet, not by a long shot. With more bad news on redundancies likely for the rest of 2009, and the knock-on effect that may have on dropping property prices, parents may not get their money back after those three years if the loan hasn't dropped to 90 per cent. And if the mortgage holder defaults on their repayments, ultimately, the parents' savings will be used to pay for any shortfall at repossession.
Here's hoping things improve quickly, eh? Or at least quickly enough to give your parents back the cash if they need it, for, ooh I don't know, the increase in medical costs that tend to come with older age, or if they lose their jobs, and all this assumes parents happen to have 20 per cent of the property value – an average of more than £30,000 – lying around, not earmarked for retirement funding, for example.
Don't get me wrong. I'm part of the "take generation" too, and it's not as if the folks aren't subbing me for other things, dinner, my TV, that trip to the States.... And they too have offered to stump up a deposit so I can escape the circus that is the London rental market. But my parents are the typical sandwich generation – financially supporting their parents and their own children while fast approaching retirement themselves. They don't need the added pressure simply because I fancy something I haven't saved for. I'm not prepared to pass on the risk that the banks are more than happy to hand to someone else rather than reintroduce a true 95 per cent loan.
And anyway, surely this is an extension of the mentality that got us into this trouble in the first place – buying things we can't afford. Yes, affordability has improved thanks to the drop in house prices, so first-time buyers may not be as financially overstretched as they were at the end of 2007.
But if you haven't managed to scrape together a deposit of more than 5 per cent, despite the lower prices and the falling cost of living, can you really be confident that you can afford not only the repayments, but also the surveyors', solicitors' and admin fees, decorating and furniture? And that's just for starters. God help us, no sorry, God help our parents bank accounts if later down the line it turns out the wiring is dodgy as well.
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