Lloyds launches 95% mortgage

A mortgage that enables parents to help children to buy their first home but without drawing on their own savings has been launched by Lloyds Banking Group.

The government-backed bank is offering to lend up to 95 per cent of a property’s value for first-time buyers, provided that the buyers’ parents have a specified amount of cash in one of its accounts.

The new deal should help ease the difficulties faced by first-time buyers, many of whom have been excluded from the market as lenders have required larger deposits.

It will have a fixed rate of 4.39 per cent for three years, considerably lower than other offers available to borrowers with small deposits.

But it has a number of restrictions. The buyer must put down 5 per cent of the property value in cash and their parents must have a further 20 per cent of the property value in cash savings with Lloyds.

This money can continue to earn interest even after the mortgage is taken out. However, Lloyds will have a legal charge over the savings and will be able to draw on it should the housebuyer default on the mortgage.

”The legal charge on the parents’ savings account means we can offset the risk of lending at this level to offer a realistic and affordable option for first-time buyers,” said Stephen Noakes, commercial director of mortgages at Lloyds Banking Group.

Few other lenders are currently prepared to accommodate borrowers with just 5 or 10 per cent in cash and those that do tend to charge far higher premiums. Yorkshire Bank, for example, has a three-year fixed rate of 6.99 per cent for a loan-to-value ratio of 95 per cent.

”Lenders have been reluctant to lend at such high loan-to values in recent months because of falling house prices and the risk of negative equity,” said Melanie Bien, director of Savills Private Finance, the independent mortgage broker.

She said capital adequacy requirements, which mean lenders need significantly more cash available to offer high loan-to-value loans, were also a deterrent.

Laying claim to a parent’s saving account in effect allows Lloyds to offer rates that would typically be reserved for borrowers with deposits of 25 per cent to potential borrowers with much smaller deposits.

David Hollingworth at London & Country Mortgages said another advantage to the deal was that parents could keep hold of their cash savings.

”While they won’t have the ability to withdraw savings until the charge is released, it does mean that the cash doesn’t have to be gifted as part of a bigger deposit,” he said.

Lloyds said that at the end of the three-year deal, the legal charge on the savings account could be removed provided the borrower’s

loan-to-value ratio had fallen to 90 per cent.