Wednesday, 16 March 2011

Councils chip in for first time buyers

Here are the mechanics of the new Local Lend a Hand scheme adding to help for first time buyers. As you'll see, whether it works or not rather depends on whether councils manage to select young buyers who don't default.

Take the example of Warrington in Cheshire. The council will set aside £5m to deposit with Lloyds TSB as security for new mortgage borrowers who can't get help from the Bank of Mum and Dad, but can afford the monthly repayments.

The buyers don't receive any money from the council. But Warrington will put 20% of the purchase price of each home into its Lloyds TSB account.

With the security of the council's cash, Lloyds will offer the first time buyer a 95% mortgage. So the bank will only demand a 5% deposit from the buyer.

There's an extra benefit in the rate charged to the borrower. Lloyds will give them the fixed rate usually proffered to homebuyers who can manage a 25% deposit. The monthly payments will be significantly less.

On the other hand, if the buyer defaults, then the council could lose some or all of the cash it has put up for that particular property.

The scheme could help 300 buyers in Warrington and varying numbers in the other 4 local authority areas. 10 more councils are waiting in the wings, which is why Lloyds is talking about tens of thousands benefiting, eventually.

So what's in it for the council?

It is a policy objective to get young people on the housing ladder and off the waiting list for social housing. Also, council officers want to bring disused housing back into occupation and boost the local economy. Any nudge to buying activity would help.

But the question is whether this route makes sense financially. In a time of cuts council tax payers don't want to see their funds being diverted unnecessarily.

Here's Warrington's answer:

*The money is part of its cash flow. It would be depositing cash somewhere anyway.

*It gets a better interest rate from Lloyds under the scheme, around 4%, than it receives elsewhere.

*The average rate of default is 0.3% or £3,000 for every £1m invested, so there isn't a big risk of losing out.

In the end, it comes down to whether the needy people selected by councils and approved by Lloyds TSB will be reliable enough to keep any losses to a minimum.

If they are then more councils are likely to sign up and more lenders could join the panel of banks providing the mortgages.

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