Mortgages: How first rung of property ladder can be brought within reach

Home ownership remains out of reach for most first-time buyers but more plans aimed at lowering the first rung of the property ladder have been launched in recent weeks.

Lending to first-time buyers has slumped dramatically in the past three years as lenders continue to make the best mortgage deals available only to those with at least a 25 per cent deposit.

And while there have been some signs of lenders easing their terms - with Northern Rock recently joining a small band of firms in offering a 95 per cent loan-to-value mortgage - lenders admit that mortgage levels will remain static at best throughout 2011.

Prices have not yet fallen to the extent that many expected, so would-be-buyers have not benefited from a boost in affordability. The bleak outlook means that for many first-timers, shared ownership schemes and housebuilder-led initiatives may currently be the only way to get a foot on the ladder.

Where housebuilders used to offer incentives such as carpets and white goods, they now focus on helping out with the finance. Similarly, there is increased appetite among some lenders to develop mortgages that make it easier for those without big deposits to access finance.

However, lenders are increasingly restrictive in the incentives they allow builders to offer. Two years ago a number developers were helping buyers directly with their deposits, but banks and building societies have now clamped down on such incentives, wary of being exposed to greater risk.

Now, builders focus on shared equity schemes, where they retain some of the equity in the property for a certain period.

While the various initiatives on offer can help some first-time buyers get on the property ladder, they don't do so in the numbers needed to boost the housing market. They also fail to address the fundamental problems of mortgage availability and the problem of the supply of affordable housing.

But they are all that many prospective buyers can hope for, unless prices fall further and first-time buyer loans become more affordable. So here are the main incentives and initiatives currently aimed at first-time buyers.

n Shared equity

Shared equity schemes, where housebuilders retain part of the home while the buyer builds up their stake in the property, have accounted for more than 50 per cent of sales at several Scottish firms over the past year. Mactaggart & Mickel, Tulloch, Parc, Stewart Milne, Cruden and Miller are among the builders promoting shared equity deals.

Some of the propositions are part of wider incentive packages, such as Stewart Milne's First-time Buyer plan, which also includes mortgage protection insurance and the option of a deferred payment mortgage.The Cala Homes part-pay plan is typical of the genre, allowing buyers to take out a 75 per cent loan-to-value (LTV) mortgage with the 25 per cent deposit taken as a loan from the builder. Redrow has a similar deal, where it provides a deposit of up to 15 per cent that the buyer has to repay within ten years.

The Scottish Government's Low-cost Initiative for First-time Buyers (Lift) schemes include the New Supply Shared Equity plan, aimed at low income buyers. This requires buyers to contribute between 60 and 80 per cent to the purchase of a new-build property, with the balance covered between the government and developer.

The deal is available only on properties worth 140,000 or less and the government's stake in the purchase can be repaid from the proceeds should the property be sold.

David Rolleston, director of Mortgage Advice Brokerage in Glasgow, has overseen several shared equity purchases. "They allow the client to build up their income, reduce the loan amount and also hopefully see an increase in the value of the property," he said. "They are probably more suited to younger people who do expect to see a decent increase in their incomes during that time frame."

Local lend-a-hand

Launched just last week, this sees local authorities act as guarantors for first-time buyers to help them secure mortgages needing deposits of just 5 per cent. Lloyds TSB Scotland is the first lender to sign up to the scheme and East Lothian is one of the five local authorities taking part in the pilot (and the only one in Scotland).

It involves local authorities topping up the deposits of those buying homes in a designated area. The mortgage has to be at least 25,000 and the usual lending checks are carried out. But those putting down at least a 5 per cent deposit get a competitive Local Lend a Hand mortgage for the remainder and local authorities deposit up to 20 per cent in a corporate account with the lender.

Some brokers are sceptical about the offering. Rolleston said: "The upshot is that Lloyds is using the argument that it allows consumers to secure better rates, which is fine in itself. However, that is only because lenders are still charging high levels of interest to first-time buyers who have a limited deposit.

"All this scheme provides is added security to the lender at the expense of the taxpayer."

Deposit help

Housebuilders have been forced to curtail their deposit support deals in the face of lender antagonism. However, there are still some variations on the theme, with several plans aimed at buyers with relatives who are able to provide some assistance.

The Barratt Homes First Deposit scheme, for instance, asks buyers for a 5 per cent deposit and requires parents to take a loan through the builder for a further 15 per cent of the purchase price. The loan is unsecured so the parents' own property is not at risk.

The best known such initiative is Lloyds TSB's Lend-a-Hand deal.- not to be confused with the local authorities project in which the bank is involved. The plan now accounts for a third of Lloyds TSB's first-time-buyer business across the UK.

It works by requiring a deposit of just 5 per cent from the borrower, provided parents, grandparents or friends set another 20 per cent of the value against the loan. That money is held in a Lloyds savings account and must stay there until the buyer has at least 10 per cent equity.

But while these have generated plenty of interest, particularly the Lloyds deal, they fail to address the difficulties facing those without generous relatives able to help out.