Money Insider: Lloyds extends a helping hand to first-time buyers
Saturday 10 July 2010
it's not only first-time buyers who have found the 10 per cent-15 per cent deposit requirement a barrier to home ownership, but also those who bought near the peak of the housing boom will be suffering too if they need to move.
In recognition of this Lloyds TSB has extended its "Lend a Hand" mortgage, originally launched for first-time buyers in May 2009, and opened the scheme to first-time sellers too. Under the terms of this niche product Lloyds TSB will lend a maximum of 95 per cent of the value of the property with the proviso that 25 per cent of the purchase price is provided by the buyer and their parents or family member, with the buyer contributing a minimum of 5 per cent of this.
Because the bank is in effect only advancing 75 per cent of the value of the property by taking a legal charge over the parent's contribution, their risk is far lower than with a traditional 90 per cent plus advance and the less punitive interest rate reflects this.
The 4.79 per cent rate (plus £895 fee) over three years is for Lloyds TSB current account holders, whereas those who bank elsewhere will have to pay a slightly higher 4.99 per cent. Whilst transferring your current account is often seen as a hassle, in this case it's worth the effort as a 0.2 per cent reduction on a mortgage of £142,500 will save £576 in repayments over 3 years. There are also no-fee options of this product available priced at 5.49 per cent for current account customers or 5.69 per cent non-customer applicants.
Many parents will do all they can to help their children establish a footing on the housing ladder and the terms of the "Lend a Hand" scheme are likely to prove popular with those who have sufficient capital at their disposal.
So what's the catch? There isn't one really, as long as there is at least 10 per cent equity at the end of the three-year term the bank will release the parents from their obligation and will return their savings to them. The worst-case scenario would see the "Bank of Mum and Dad" having to leave their savings as a back-up for a longer period, ie until the 10 per cent equity figure is achieved.
The fixed interest rate of 3.75 per cent paid to the parents in lieu of their contribution can be bettered; but it is still a respectable savings rate and above the current market average of 3.50 per cent for a three-year term. If the parents were to invest say £30k (20 per cent deposit on £150k mortgage) rather than in a best buy fixed rate savings deal at 4.15per cent they would lose out on £336 (net of 20 per cent tax) over the 42 months – a sum of interest that I'm sure many would be prepared to sacrifice in order to help their flesh and blood live more comfortably.
Some may argue that the pricing looks expensive when compared with the mainstream 75 per cent LTV 3-year fixed rate mortgages from Principality Building Society or the Co-operative Bank at 3.49 per cent and 3.79 per cent respectively. However, although borrowing £142,500 at 3.49 per cent instead of 4.79 per cent would reduce your repayment by around £100 per month, when you factor in the monthly interest of £93.75 the parents/family member receive on their stake it shows that "Lend a Hand" is competitively priced.
This sort of product innovation will provide a new and workable option for some borrowers and their families whilst hopefully helping the current subdued property market to keep ticking over.
With the best buy rates on one-year fixed rate bonds hovering around the 3.00 per cent mark, the wafer-thin premium above instant access savings accounts makes you wonder why people are prepared to forgo access to their funds for a full 12 months in return for just an additional 0.2 per cent before tax.
For those with internet access the 2.80 per cent instant access accounts from AA and Egg are best buy products, although both include a hefty bonus element of 2.30 per cent for the first 12 months. For those who prefer face-to-face banking in a branch environment, Post Office this week launched a reward saver account paying 2.5 per cent AER that gives savers the choice of giving 30 days' notice for withdrawals or instant access subject to losing 30 days interest on the amount withdrawn, thus providing the combination of access and a reasonable rate.
Leeds Building Society has just launched a five-year fixed rate bond with a twist. It allows penalty free access to 50 per cent of your deposit during the term. Whilst the rate of 3.50 per cent is 1.25 per cent below the ICICI Bank 5-year best buy bond at 4.75 per cent, the ability to access half of your savings at any time will undoubtedly appeal to savers seeking additional flexibility.
Andrew Hagger is a money analyst at Moneynet.co.uk
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