Lloyds offer first time buyers 95% mortgage

Deal comes with a catch for parents

Lloyds gave first time buyers some hope last week by reintroducing a 95% mortgage. Before the bunting is put up and the street party commences, however, take care to note there is a condition to their generosity – parents must stump up their savings as guarantee.

First time buyers’ relying on their parents to help them obtain a mortgage is nothing new but the devil is in the detail of this new offering from Lloyds. To be eligible for a first time buyer mortgage – aka Lend a Hand – parents are required to invest 20% of the value of the property into a fixed-rate savings account with
Lloyds for three-and-a-half years.

No small matter, but then Lloyds have two reasons to be fussy. Firstly the market is still fluctuating and unemployment is a growing threat therefore prudence is expected. Secondly, not many other lenders are willing to offer 95% mortgages. Halifax for example, pulled out of the market in November. While Clydesdale Bank and Yorkshire Bank are offering 95% loans, their interest is 6.99% compared with just 4.39% on the Lloyds deal.

So how does it compare to Lloyds pre-housing crash first time buyer mortgage? Say your son or daughter wants to buy a £200,000 property. Prior to the crisis,

Lloyds would have asked for a 15% deposit or £30,000. Lloyds, under the new deal, are currently asking for a 5% down payment or £10,000. Thus making repayments on the 95% loan £1,044 on the £200,000 property.

The parents, however, back up the purchase by depositing £40,000 in a Lloyds savings account at 3.5% interest. While this is a reasonable level of interest, it isn’t the best on offer — Birmingham Midshires pays 4.35% — and the cash is tied up for three and a half years.

The danger with Lend a Hand is that if the home needs to be repossessed, the house and the savings disappear into the bank’s coffers.

Alternative solution

A parent who has the cash and is willing to help their child get on the property ladder may be better contributing to the deposit which will ensure a lower interest rate.

The market-leading rate on a three-year, fixed-rate mortgage is 3.95% from Market Harborough building society. The deal has a £999 fee and is available for borrowers with a 25% deposit.

If your child has a deposit of £10,000, as in the Lloyds example above, parents would have to put up £40,000 towards the deposit to get the Market Harborough deal, but monthly repayments would be £787 — £257 less than the Lloyds deal.