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Councils Pioneer Scheme to Help First-Time Buyers

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Five UK councils are set to pioneer a scheme to assist first-time buyers by topping up their home deposits.  Many first-time buyers are currently frozen out of the market because of the high deposits that lenders currently require.  The scheme is called ‘Local Lend a Hand’ and is aimed at buyers who can afford the monthly mortgage repayments but do not have a hefty lump sum saved up.  The councils involved so far are Warrington, Northumberland, East Lothian, Blackpool and Newcastle-Under-Lyme.      


Under the scheme, the council puts 20% of the house price into a Lloyds TSB account, which does not go to the buyer.  Instead, the council gets a healthy rate of interest on this sum and the borrower gets a competitive mortgage rate.  However, there is an element of risk; if the buyer defaults, the council could lose its money.  It would appear that the deposit boost is clearly required though, as a recent survey by the Financial Services Authority (FSA) showed that only 2% of new mortgage lending, in the final quarter of 2010, was extended to those offering a deposit of less than 10% of the property’s value.


The scheme could potentially benefit around 300 buyers per area and if rolled out to another 10 councils, who are apparently waiting to join, could help thousands of first-time buyers.  The project has been welcomed by the Housing Minister, Grant Shapps, who had recently encouraged the industry to help first-time buyers at a recent summit.  However, the project has its knockers; some commentators believe that the local authorities should not be investing money in a non-buoyant house market at a time when their budgets are being cut.


Firstbuy


Following this spring’s budget, the Chancellor has pledged £250m towards another first-time buyer scheme called Firstbuy.  Apparently 10,000 buyers will be eligible for the scheme, which has been welcomed by the House Builders Federation.  Mr Osborne has stated that Firstbuy will be funded by the levy on banks, but the scheme will only last for one year and has been described by lenders as “modest.”  Around £210m would be spent in England with the other £40m being spent in Wales, Scotland and Northern Ireland.


The Firstbuy scheme would see the government and house builders offer loan help for first-time buyers purchasing a newly-built home.  Buyers must save a deposit worth 5% of their property's value, with the government and house builders putting up 10% each through an equity loan, enabling people to qualify for 75% loan-to-value mortgage.  The equity loan would be interest-free for the first five years, with interest charged at 1.75% in year six, and at inflation plus 1% thereafter.  A similar temporary scheme was introduced by the previous Labour government, and was considered a success by house builders.  But the Council of Mortgage Lenders (CML) said the latest scheme was less generous than the previous administration's HomeBuy Direct scheme.