It’s not an easy time to enter the housing market. House prices may have fallen by 1.4 per cent in January throughout the UK, but the Department for Communities and Local Government reports that, in Scotland and the West Midlands, they dropped by 3.2 per cent. The main reasons for the decline are a combination of government spending cuts and the mortgage drought.
There are some who argue that the housing market still has some way to fall. The problem is that many potential buyers are sitting on their hands in the face of the looming government spending cuts and economic uncertainty, while those who want to press ahead with a purchase are continuing to struggle to raise the mortgage finance they need.
Howard Archer, chief UK and European economist at IHS Global Insight, explained that “the housing market will be pressurised over the coming months by high and likely-to-rise unemployment, negative real income growth, the increasing fiscal squeeze, very low consumer confidence, and ongoing difficulties in getting a mortgage, particularly for first-time buyers.
“We suspect that house prices will fall by around 5 per cent in 2011 and end up losing around 10 per cent from the peak levels seen in the first half of 2010.”
However, one of the major banks introduced a new scheme yesterday which may help. It’s from Lloyds TSB Scotland and is called “Local Lend a Hand”, described as “a new concept designed to help first time buyers purchase a home with a deposit of just 5 per cent”. That’s still going to be a lot of money for some people to find, but much less than to 10–15 per cent which many lenders demand.
The bank says it is “responding to calls for further innovation in the first time buyer market”. It’s part of a wider initiative where mortgages are offered to first-time buyers and home movers who can only raise a smaller deposit with the support of a “helper” – usually parents or other family and friends. In the new scheme, local authorities will take on that role instead.
According to Carol Anderson, the bank’s head of mortgages, “We know that a lot of young people turn to the ‘Bank of Mum and Dad’ to get their foot on the ladder, but that’s not a solution for everyone. By developing Local Lend a Hand and working with local authorities across the UK, we’re broadening the prospect of home ownership to even more first time buyers.
“Helping people to buy their first home is crucial in achieving and maintaining a sustainable housing market. With Local Lend a Hand, we’re taking our existing Lend a Hand product to another level and addressing the real challenges first time buyers face.”
So how will it work in practice? Fifteen local authorities across the UK have joined in the initial trial. Each of them decides where the scheme will be available in their area. The first-time buyer still has to find at least 5 per cent of the value of the property but the Local Lend a Hand mortgage covers the rest, subject to usual lending criteria.
This isn’t a shared-ownership scheme, because the first-time buyer will own the property outright. But the local authority will provide a cash backed indemnity of up to 20 per cent of the property value as additional security with interest being earned on this amount. While it’s up to each council to decide on the size of the loans, mortgages will be offered between £25,000 and £350,000.
The only council in Scotland to be part of the scheme in the first stage is East Lothian. Councillor Stuart Currie explained that “the effects of the financial crisis of 2008 continue to have a negative impact on the housing sector, particularly those seeking to purchase their first home.
“The amount of deposit required by most mortgage lenders means that many people cannot afford to take their first step on the home ownership ladder and so additional pressures are placed on social housing. This innovative scheme will provide an opportunity for potential first time buyers to secure funding for their deposit and eventual purchase of a property.”
He confirmed that the council would make a cash investment with the bank to back up the agreed overall value of the guarantee. The result is that there will be a cap on the amount that can be provided under the scheme and the number of borrowers who can access it. It has still to decide on the areas where the mortgages will be available.
“We know that the current demand for affordable housing in East Lothian greatly exceeds availability,” said Mr Currie. “This scheme enables the council to provide an additional choice for individuals, couples and families seeking their own home at an affordable cost. I am sure when the scheme is finalised and launched it will generate tremendous interest.”