Lloyds Bank’s Lend a Hand mortgage allows first-time buyers in England and Wales to buy a home costing up to £500,000 without a deposit.
The new loan covers between 95 and 100 per cent of the purchase price of a first home. However, buyers will need a family member with substantial savings to stump up 10 per cent of the property price as security in order to access the 100 per cent mortgage.
This money will go into a three-year fixed-term savings account earning 2.5 per cent interest, which will be repaid at the end of the term but cannot be accessed before that. If the buyer misses any mortgage payments these will be deducted from the savings.
Why has the Lend a Hand mortgage been introduced?
With the average first-time buyer now putting down a deposit of £110,182 in London and £33,211 in the rest of the country, raising a lump sum is one of the biggest hurdles to getting on the property ladder.
First-time buyers – what you need to know when buying your first home
According to a Lloyds poll, half of aspiring first-time buyers said raising a deposit was their biggest obstacle when trying to buy a home.
On average, 18-35 year olds are saving £182.80 per month, meaning it would take them 15 years to save for a deposit, or 52 years in London.
“This product is helping to address the biggest challenge first-time buyers face to getting on to the property ladder, while rewarding loyal customers in a low-rate environment,” said Vim Maru, group director, retail at Lloyds Banking Group.
How the Lend a Hand mortgage works
The Lend a Hand mortgage is the current best buy for both buyers and savers. It is fixed at 2.99 per cent interest for three years, which is 0.1 per cent lower than the similarly structured Family Springboard mortgage from Barclays.
- House price: £425,030
- Monthly payments at three-year fixed rate of 2.99 per cent: £2,013.33
- Monthly payments on Lloyds standard variable rate of 4.24 per cent after three years: +£286.84 = £2,300.17 (for remaining 22 years)
The 2.5 per cent savings rate for the Lloyds mortgage is slightly higher than the Barclays one, which is guaranteed to be 1.5 per cent above bank base rate for three years. Currently that sets the Barclays savings interest at 2.25 per cent, although this could rise or fall depending on what happens to interest rates.
The Barclays Family Springboard mortgage also has a maximum term of 25 years, while the Lloyds mortgage can be taken for 30, making monthly repayments lower — although this would increase the total amount of interest paid over the course of the mortgage.
Unlike other similar schemes, the Lloyds mortgage is quite flexible on which family members can contribute – first-time buyers can get help from their children, siblings, grandparents or aunts and uncles.
Either the buyer or family member must be a Club Lloyds Current Account holder, which has a £3 monthly fee, unless £1,500 is paid in each month.
What’s the catch?
The words ‘100 per cent mortgage’ are bound to ring alarm bells for some people, wary of a return to the type of lending seen during the period leading up to the financial crash.
This new product is not quite a re-run of the 100 per cent-plus loans being offered in 2008, given the need for the 10 per cent lump sum to back it up. But there are some considerations buyers should bear in mind before taking out such a large loan, especially in the current housing market amid Brexit-uncertainty.
House prices are forecast to remain broadly flat over the next three years and to fall in London this year.
If house prices remain at their current level, buyers taking up this 30-year mortgage will still need a 93.5 per cent loan to value mortgage when the three-year fixed term is up in 2022, says Andrew Hagger of Moneycomms.co.uk.
If the family member decides to take back their 10 per cent at this point it may be difficult for the buyer to remortgage, forcing the buyer onto the Lloyds standard variable rate.
“What remains to be seen are the options available to borrowers when the three year fixed rate has expired. Being left with such a high loan to value sum should allow borrowers to re-mortgage elsewhere although options will be very limited,” says Colin Payne, associate director of Chapelgate Private Finance.
“At the present time, a borrower wishing to re-mortgage at this loan to value would be offered similar rates to Lloyds Bank’s three year fixed rate of 2.99 per cent.
“Lloyds Bank has also said it will offer options to borrowers when the fixed rate expires, however, these will clearly be based on the loan to value at the time and if property values have fallen the rates on offer are unlikely to be as attractive as the original terms.”
In a worst case scenario, if house prices fall in the next three years — not impossible given the current level of Brexit uncertainty — then buyers could end up in negative equity, unable to remortgage or move and trapped on Lloyds’ standard variable rate.
Can I use other first-time buyer schemes with the Lend a Hand mortgage?
While the family member provides security for the loan, the deeds will be in the first-time buyer’s name.
This means they can benefit from the stamp duty reductions available to first-time buyers, which is not possible if someone who has previously owned a property has their name on the deeds too – for example if buying jointly with a parent who owns their own home.
The loan can’t be used for new builds, shared equity or shared ownership schemes.