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Can council loans rescue first-time buyers?

by: Mortgage Solutions
  • 24/03/2011
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Lloyds TSB has launched a scheme developed with Sector Treasury Services that offers first-time buyers a 95% LTV mortgage backed by a loan from the local authority of up to 20% of the property value.

Will local authority loans turn around the first-time buyer market?

Tackling the issue on this week’s Market Watch are:

Mike Jones, sales director of mortgages Lloyds Banking Group

Cecilie Booth, director at Sector Treasury Services

Ray Boulger, senior technical manager at John Charcol

Mike Jones, sales director of mortgages Lloyds Banking Group

First-time buyers are often deservedly credited with holding the key to the housing market.

As a lender, finding ways to help these borrowers is key for us and it was at the top of Grant Shapp’s to-do list when he was appointed Housing Minister.

The products that are available in the Lloyds TSB Lend a Hand range aim to tackle the two key issues that first-time buyers face.

Firstly, a lack of deposit. This product allows people to buy a home with a 5% deposit in stark contrast to most major lenders.

Secondly, those that do manage to find the necessary deposit can find product pay rates prohibitively high. Lend a Hand draws on the security of savings provided by a helper to allow them access to rates for borrowers with larger deposits.

The original Lloyds TSB Lend a Hand allowed first-time buyers to turn to the Bank of Mum and Dad. Local Lend a Hand recognises that not everyone is fortunate enough to be able to rely on parents to give them a leg up onto the ladder.

The success of Local Lend a Hand will be dependent on the number of local authorities that sign up, but we’ve seen a very strong start. In addition to the five named at launch, we’re in advanced discussions with a further ten and, following the launch, we’ve seen even more coming forward to register their interest.

One product alone can never be responsible for turning around the first-time buyer market. That is simply because one product will never be right for everyone.

However, lenders and the industry as a whole should be challenging itself to develop products that find solutions for the real issues facing borrowers.

Local Lend a Hand might not be the right product for everyone, but it shows the innovation that is critically important to the market and, crucially for some people, it will make home ownership a reality.

Cecilie Booth, director at Sector Treasury Services

The combination of relatively high house prices and understandable caution over lending from banks and building societies means that many potential first-time buyers are unable to save a sufficient deposit, even though they could afford mortgage repayments on a typical first home.

The national scheme is designed to bridge that gap, with local authorities helping borrowers with the cost between a typical 75% LTV mortgage and a 95% deal offered by most lenders.

Local authorities could both free up affordable and social housing for those who cannot afford to make mortgage repayments and reduce payouts to private landlords and expensive short-term accommodation.

More people will be able to take the step of buying their first home, stimulating the local housing market and benefitting the wider local economy.

Lloyds TSB is the first high street bank to join what should eventually be a panel of lenders to offer mortgages under the scheme.

The key elements of the scheme are:

– Local authorities and mortgage lenders work in partnership, sharing expertise and associated risks. Participating local authorities will provide an indemnity to fund up to 20% of a first time buyer’s mortgage by depositing funds with the lender.

– The deposit will remain in with the lender for five years, with a possible extension of a further two years if a mortgage is in arrears during the last six months. The deposit will attract a premium rate of return to compensate the local authority for the risk they are taking.

– After this time, the deposit will be returned to the local authority, interest will be paid annually or on maturity

– Local authorities will only incur actual costs if a loss is incurred by the mortgage lender, such as through arrears or repossession. The first 5% of the loss would be borne by the property owner, the next 20% by the local authority and the remaining balance by the lender.

– Defaults are anticipated to be around 0.3%, meaning that a local authority providing £1m of finance faces a potential cost of £3,000.

– Losses could be fully or partly offset against the premium rate of return achieved on the deposit held with the lender.

– Lenders will still apply their normal lending criteria to ensure affordability.

Ray Boulger, senior technical manager at John Charcol

This won’t kick start the first-time buyer market, but the key question here is whether local authorities should be engaging in this kind of activity.

The same criticism could be made about the government’s HomeBuy scheme. But the local authority scheme is actually less risky for the public purse because local authorities will receive a guaranteed rate of interest on their investment.

The government receives no interest on its investments in the Homebuy scheme, instead taking a proportionate share of any increase or decrease in the value of the property when its funds are repaid.

It is rather ironic that the local authorities and Lloyds TSB are offering this scheme to deal with a problem caused by market failure and a key reason for this market failure is the much tighter regulatory stance recently adopted by the Basel Committee and the FSA.

This means the public sector has devised a scheme to circumvent a consequence of the more intense regulation supported by the government.

This will be very profitable for Lloyds because, although it says the rate will be cheap for a 95% mortgage, its risk will be similar to a 75% mortgage.

The rate is unlikely to be competitive at 75%, although it doesn’t have to be to provide good value for the borrower.

As this mortgage will only be available direct from branches of Lloyds TSB, potential borrowers will only have access to either information only or biased advice on the mortgage.

Yet, the types of borrower this scheme is likely to attract are very much those who should have access to independent advice.

The rate of interest the local authorities will receive from Lloyds on the 20% of the purchase price deposited with the bank will be well in excess of its cost of funds and hence generate a profit for the council.

Whether this will be sufficient to cover any losses the council may make only time will tell.

Also, local authorities have a statutory housing responsibility and if this scheme is targeted at people on their housing lists, it clearly benefits the council.

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