Lloyds launches 5% deposit mortgage

Lloyds TSB has become the fourth high street lender to offer borrowers a 95% mortgage since the start of the recession.

In order to qualify for the loan, however, friends or relatives of the borrower must hold savings worth 20% of the property's value in a special account with the bank.

The so-called Lend a Hand mortgage offers first-time buyers with just a 5% deposit a three-year fixed rate of 4.39% - a rate equivalent to people borrowing 75% of their home's value.

With the savings tied up for three-and-a-half years the savers can earn a fixed rate of interest of 3.5%.

If the borrower fails to meet mortgage repayments there is a legally binding agreement which allows the bank to use the savings to make up any shortfall.

However, at the end of the three-year deal if the homeowner's loan-to-value (LTV) ratio has fallen to 90% as a result of mortgage repayments and rising house prices, the borrower can operate their mortgage independently without the looming legal charge.

Lloyds TSB said that the loan charge enables it to offer the same credit requirements for borrowers with just a 5% deposit as those who had a 25% one, therefore opening the housing market up to more first-time buyers.

The deal will also enable parents and other family members to help out their children without losing control of their savings by locking them up in a house deposit.

According to the Council of Mortgage Lenders, 38% of homeowners under 30 had financial help from their parents when getting on to the property ladder, with the average person receiving £35,000 towards a deposit.

Andrew Montlake, director of mortgage broker Coreco, said: "While there are a few conditions to this new mortgage product, they are far outweighed by the positives.

"4.39% fixed for three years at 95% LTV is an exceptional rate. The 3.5% fixed interest (savings) rate isn't too bad at all in the current market."

The launch of the new helping hand deal has been welcomed by brokers, who say it is a positive step forward for the industry in the current economic climate.

David Hollingworth, of London and Country, said: "It is hard to find anything to criticise. It is very positive."