Taxpayers are propping up first-time buyers

Five councils have already signed up to a scheme to put up taxpayers' money as security for first-time buyers.

Sector Treasury Services, part of the Capita Group, has designed a scheme to encourage councils to support locals trying to get onto the property ladder. And some councils have already signed up to take part.

Lloyds' Lend a Hand scheme

Lloyds TSB already has a scheme in place where first-time buyers can put down a deposit of just 5%. As usual, the first-time buyer will take out a loan of the remaining 95% and pay interest on it.

Helpers, such as parents, must put down security worth 20% of the property or, if the buyer's deposit is 10%, the parents would put down security of 15%, for example. A £160,000 property would require a deposit from the buyer of at least £8,000 and security from helpers of up to £32,000.

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The security is not a deposit. Lloyds holds onto it in case the property is sold at a loss, repossessed, or in case the buyer defaults. Then Lloyds can make up its losses by dipping into the security.

What the borrower gets out of it

Most loans these days require at least a 10% deposit and to get a good deal you need at least 25%. This scheme helps people buy who couldn't otherwise afford the deposit and it potentially helps them get a better deal.

Borrowers using this scheme can get fixed-rate mortgage deals with “similar” interest rates to those that Lloyds offers to borrowers with 25% deposits. Lloyds doesn't specify these interest rates, so borrowers should compare all options, such as other lenders' rates and having the patience to save a larger deposit. You can read about some of your other options in Buy a house with a 95% deposit.

What the helper gets out of it

The helper gets paid interest on the security at 4%pa for the first three-and-a-half years, and thereafter at the Bank of England base rate minus 0.5%.

Another advantage to the helper is that they are potentially able to get their money back sooner than if they simply paid the deposit. After three-and-a-half years, provided the introductory mortgage deal has expired and the outstanding mortgage debt is below 90%, helpers are allowed to get their money back.

What Lloyds gets out of it

The scheme has been criticised as risky for Lloyds, but I think that's not necessarily the case. The bank can offer more loans with effectively the safety of a 75% loan-to-value, while getting paid more interest, as on a 95% loan-to-value mortgage.

What's more, they can re-lend the security for at least 3.5 years to make even more money. If that sounds a bit ponzi to you, well, ponzi is how banks have made money for 400 years.

How the councils fit in

Sector Treasury Services' idea is that councils can be that helper who puts down the security, enabling first-time buyers struggling with deposits to get on the ladder. To put it another way, taxpayers' money gets tied up in the riskiest mortgages.

There is good and bad news for taxpayers. Lloyds tells me this scheme hasn't been finalised, but councils can expect better than 4% interest. The bad news is the money will likely be tied up for at least five years.

This is one of those crazy schemes to add to the pile we've seen over the past decade and more that have supported and boosted house prices for too long: self-assessment mortgages, 8-10 times income mortgages, 110% LTV mortgages and now council-funded deposits for FTBs.

The guilty councils that have already signed up to this madness include Blackpool City, East Lothian, Newcastle under Lyme, Northumberland County and Warrington Borough.

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Sector Treasury Services has been quoted as saying that the scheme is to “[stimulate] the local housing market” and that it would be “[beneficial for] the wider local economy”.

In other words, the scheme is to support house prices. It seems like a risky idea for councils to try boosting the local economy in this way. Encouraging businesses to move there and hire more staff would seem to be a more traditional approach.

Another benefit is supposed to be for first-time buyers, but wouldn't they be better off if councils allowed more houses to be built instead? Despite our high population, three-quarters of land in the UK is still green, so I think we can fit in another few million houses without eating up much more of our natural environment.

We must also consider whether we want councils risking losses in this way in return for savings interest that doesn't even beat inflation, rather than investing immediately in roads, schools and hospitals, or even returning that spare cash to taxpayers, so that we can reduce our large existing personal debts. That seems to me to be better than encouraging yet more borrowing.

I sympathise with the plight of first-time buyers, but do we really pay our taxes to give them a leg up? Those who want to own but can't even afford the 5% required get the worst of this deal, because their taxes go to help others achieve what they are trying so hard to save for.

If you can't afford to put aside the few hundred a month it takes to steadily save for a decent-sized deposit, I think you should really question the sense of buying a home with a 95% loan. In a few years your initial fix will be over, and then you could easily see yourself facing much higher interest rates on your considerable remaining debt.

My view is that we are living much longer, which means we can afford to start later and be more patient in saving for a deposit, waiting for the time and price, and our incomes, to be right. After all, homes don't just become less affordable all the time, as you'll see in Mortgage affordability at 10-year high. There will be opportunities in the years ahead, so don't panic buy.

As for councils, they should fight NIMBYism and build more houses, with central government direction.

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