First-time buyers turn to 'bank of mum and dad' to get a mortgage

Housing minister Grant Shapps chaired a mortgage industry summit on Tuesday. The subject? First-time buyers or, to be more specific, what lenders can do to help people climb on to the property ladder. Lenders are obviously worried about this because the fewer new borrowers there are, the less profits they can make. The government is keen to kick-start the market as it will, in turn, boost the economy.

Part of the perceived problem is people think lenders won't grant mortgages at the moment. It's true that the days of easy borrowing have disappeared, but there are a few decent deals appearing, especially for those who can raise a ten per cent deposit. That's relatively positive compared with a few months ago when it looked terribly bleak for anyone hoping to buy their first home. The best deals then were only being offered to those who could raise a 40 per cent deposit – far beyond the means of almost all first-time buyers.

This week's summit was the first step in creating better conditions for first-time buyers, according to Paul Broadhead, head of mortgage policy at the Building Societies Association. "Bringing industry and government bodies together in one room could be the start of a process which re-examines and re-evaluates the housing market," he said. But Michael Coogan, director general of the Council of Mortgage Lenders was less positive.

"Creative approaches have a role to play in helping to turn market stability into market recovery but no one will be surprised to learn that there is no simple quick-fix for a market which has changed fundamentally since the credit crunch," he warned. In other words, behind the meetings and positive messages from ministers and lenders, it isn't going get much easier for first-time buyers any time soon.

The difficulty in raising enough cash for a deposit – let alone securing a loan – has seen the number of young people turning to the bank of mum and dad more than double in the past five years. The number of first-time buyers under 30 who turned to parents or other relatives for financial support climbed from 38 per cent in 2005 to 84 per cent last year, according to CML figures. Of course, many people simply don't have the option, but for those who can turn to family for financial help, it can be the ideal solution.

Lenders have recognised that and have begun launching more parent-assisted mortgages. "For most first-time buyers it is impossible to get on the housing ladder without the help of mum and dad, whether it be with the deposit, acting as a guarantor or jointly purchasing the property," says Melanie Bien, director of independent mortgage broker Private Finance.

There are similar options such as buying with friends but doing so can lead to legal problems somewhere down the line if there's a falling out, she points out. "Clubbing together with friends or siblings to buy means a bigger contribution to the deposit and help with the monthly mortgage payments. But borrowers need to ensure they know what they are getting involved in and how they will get out of it; drawing up a legal contract at the outset stating what happens once someone wants to sell their stake will help."

Another option to consider is a new-build home as a number of developers are offering incentives and mortgages at higher loan-to-values than normally offered. Taylor Wimpey has teamed up with Melton Mowbray and Saffron Building Society, for instance, to offer a 95 per cent loan-to-value deal fixed at two years from 5.49 to 5.99 per cent. But keeping an eye on moving interest rates is important, says Bien. "While 5.49 per cent is not a bad rate for that level of borrowing, fixing for such a short time is risky in a volatile housing market in which interest rates look set to rise sooner rather than later."

Meanwhile, Bovis has a deal with Woolwich, where the lender will offer up to 90 per cent loan-to-value to first-time buyers buying a Bovis home. In return the developer provides an insurance scheme to cover the lender if the first-time buyer defaults on their mortgage payments and the property has to be sold for less than the outstanding mortgage.

Some developers have also spotted the potential of the bank of mum and dad. Hitachi Capital has linked up with Barratt to provide parents with loans of up to £50,000 to put towards their child's deposit on their first home. Meanwhile, Northstar Homes has tied up with Bath Building Society to offer what is essentially a buy-to-let mortgage for parents to help young people while they are at university.

Bath has offered a Buy For Uni mortgage since 2006. It is a 100 per cent mortgage designed to allow students to buy a property using their parents as guarantors. The new tie-up, with Northstar subsidiary Uni-Commodation, aims to ease the process by helping parents and students find a property and renovate it to the required standard. It can work well as Bath University student Jack Renders discovered (top right).

There are other guarantor mortgages around. For instance the Co-operative Bank will lend 4.5 times a borrower's income plus 1.5 times the guarantor's income. "However, you still need a 15 per cent deposit and that will still prove a stumbling block for many," points out Andrew Hagger of Moneynet.co.uk.

There is also Lloyds' Lend a Hand deal, where a first-time buyer needs only a five per cent deposit as long as their parents put the equivalent of 20 per cent of the property value in a savings account with the bank. The deal allows a borrower to access rates usually only available to those with a 25 per cent deposit. That's crucial as a 90 per cent loan can cost around two per cent more than most 75 per cent deals.

After three and a half years, if there is 10 per cent or more equity in the property then the parents are released from their obligation and can have their cash lump sum back. "I'm surprised that no other lenders have introduced something similar," says Hagger. "Overcoming the huge deposit requirement is still the major issue for first-time buyers."

Tchenguiz forfeits £220m offshore companies

A complex offshore corporate structure created by Mayfair real estate tycoon Vincent Tchenguiz to hold Britain's largest property maintenance and residential freeholds business, has been quietly surrendered to lending banks.

The freeholds and maintenance contracts are spread across the UK and include thousands of McCarthy & Stone retirement home developments as well as several luxury residential complexes on the banks of the Thames such as St George Wharf in Vauxhall, Charter Quay in Kingston-Upon-Thames and Putney Wharf Tower.

Tchenguiz effectively forfeited shares in a web of holding companies valued at more than £220m two years ago having pledged them, just months earlier, as collateral in an ill-fated attempt to stop Icelandic bank Kaupthing calling in a £1.8bn loan to his brother Robert.

Despite Vincent's efforts, the loan to his brother continued to sink into negative equity and was called in as Kaupthing itself collapsed in October 2008. The collateral backing the Tchenguiz loan was later seized by the bank's liquidators.

The assets underlying shares surrendered by Vincent Tchenguiz amount to a multibillion-pound property empire. It includes a portfolio of residential freeholds which earns hundreds of thousands in ground rents from tenants and leasehold transfer fees from those who sell.

Vincent has also effectively lost control of Peverel, a controversial group of companies which offers property maintenance, repairs and other additional services such as CCTV and buildings insurance.

Accounts filed by UK companies do not make clear that the property tycoon has lost control of holding company shares but the full picture is laid bare in court papers filed as part of a legal claim being brought by trustees to the Tchenguiz Family Trust (TFT) against Kaupthing.

As reported in Saturday's Guardian Money, recent years have seen a groundswell of frustration among tenants, variously claiming unreasonable rises in service charges, buildings insurance charges and leasehold transfer fees.

Some disgruntled tenants claim Peverel companies have also failed to adequately carry out maintenance and repairs. A website, thetruthaboutsolitaire.co.uk, set up by angry tenants, has had almost 160,000 visitors in the last 16 months. Solitaire Property Management is part of Peverel.

Meanwhile, residents at St George Wharf, a 900-apartment luxury riverside development overlooking Parliament, have for years been in dispute with landlord companies, including Tchenguiz-linked firms, and Peverel group service companies. A claim for £2.6m in alleged overcharging, supported by more than 300 residents, is to go before the leasehold valuation tribunal in May.

Much anger has been directed at Vincent Tchenguiz as company accounts for relevant UK-registered businesses state that the ultimate controlling party is the TFT, where the property tycoon is an adviser and a beneficiary.

But court papers from an ongoing case reveal shares in 14 holding companies incorporated in the British Virgin Islands, and a further four UK firms, are under the control of receivers acting for Kaupthing.

Unfortunately for Kaupthing creditors, however, the shares may not hold the value they appeared to promise three years ago. The vast majority of assets within the complex web of companies are already pledged to other banks – Deutsche Bank, Bank of Scotland (now part of Lloyds Banking Group), Merrill Lynch, BayernLB and Allied Irish Banks (UK) – under pre-existing long-term senior loan agreements.

Moreover, these agreements contain so-called "change of control" clauses which give these banks the right to call in loans if Tchenguiz fails to keep control of the corporate structure. Receivers from Grant Thornton, appointed by Kaupthing, could therefore officially take control of the underlying businesses at will. They have not technically done so, however, for fear of triggering a chain of defaults which could leave the shares that Kaupthing took as security from Vincent Tchenguiz three years ago valueless.

According to court papers filed by TFT trustees, Kaupthing's decision to appoint joint receivers over several companies' shares has already triggered various events of default. The papers claim Vincent had repeatedly warned Kaupthing liquidators of "the ruinous impact of … the appointment of receivers … on Kaupthing's security position."

The document claims that, while negotiations are still ongoing, "in effect Merrill Lynch have, as a direct result of the events of default, assumed control of the underlying portfolio, [the parent company behind the Peverel group]."

The bank has converted the loan from a long-term agreement to an overdraft repayable on demand. A 1% additional default rate of interest is being charged, adding pressure on the group to maximise the earnings it can extract from tenants' service charge contracts.

Similarly another big loan, arranged by Lloyds and advanced against part of the ground rents empire, has drifted into trouble. Lloyds, the taxpayer-backed bank, is charging a 1.75% additional default interest on the loan. According to court papers filed by TFT trustees, despite ongoing attempts to restructure the Lloyds loan, the bankers "in effect have … assumed control".

No Magic in Osborne's Merlin Trick

There's gratitude for you. The U.K. banks have spent 10 weeks patiently negotiating Project Merlin with the Treasury. As far as the banks were concerned, the deal was done: they would agree to sign up to a series of commitments to increase business lending and contribute to a regional growth fund; the government would agree to end three years of damagingly populist political banker-bashing. Then the banks woke up on Tuesday morning to hear Chancellor of the Exchequer George Osborne on the radio announcing a further £800 million ($1.29 billion) increase in the U.K. bank levy.

To say the bankers are furious is an understatement. It is not so much the sums involved—although these can be relatively easily absorbed, they will certainly have a long-term impact on the competitiveness of the City in certain balance-sheet intensive markets—but the bad faith shown by Mr. Osborne in announcing a significant tax rise without warning while he was in mid-negotiation. Governments do not usually introduce taxes outside of a budget, let alone on national radio. If the banks were under any illusion that Project Merlin would end the political assault, they clearly know better now.

But the banks should not have been surprised. Project Merlin never stood a chance. From the start, its aims were misguided. There was never going to be anything the banks could credibly deliver on lending targets, bonuses or regional growth funds that would satisfy the political requirement for them to be seen to be suffering—which is no doubt why Mr. Osborne decided to spring his tax surprise. At least this will help draw some of the sting from the inevitable derision that will meet the publication of Merlin.

The biggest problem was the focus on bank lending to small and medium-sized firms. Even if there is a way to convincingly deliver the collective commitment to increase gross lending to £190 billion from £175 billion this year—and it is not clear there is—this was the wrong target. There is little evidence that there is a genuine shortage of bank lending to these businesses. All the banks insist they have plenty of funds available for commercially-viable loans. The decline in lending over the past two years is typical in the early stages of an economic recovery. And with company balance sheets flush with cash, it is likely the U.K. corporate sector will continue to finance much of its investment needs from its own resources this year. Indeed, small and medium-sized enterprises tend not to be big users of bank credit anyway. All the U.K. banks report substantial un-drawn overdraft facilities among their business customers.

Meanwhile some of the other Project Merlin proposals are straightforward PR gimmicks, designed to appease the left-wing Liberal Democrats. Bankers privately snigger at plans for "regional outreach days" whose purpose remains obscure. A pledge to commit up to £1 billion to a regional equity fund will hardly make a difference when the real problem in much of the country is a shortage of viable investment opportunities.

But Project Merlin's biggest failure was that it did not address the one area of bank lending where government intervention could have made a difference: mortgage lending. The mortgage famine is the biggest single risk hanging over the U.K. economy— and is helping fuel serious social tensions that could yet trigger much bigger political problems than the supposed lack of business lending.

The reluctance of banks to offer mortgages at anything more than 70% loan to value has effectively frozen first-time-buyers out of the market unless they have access to the "bank of Mum and Dad." A first-time buyer looking to buy the average U.K. house, valued at about £150,000, must now raise a £50,000 deposit—well beyond the means of most people. The average age of first-time buyers without access to parental support has risen to 36. Meanwhile mortgage lending has slumped and transactions are running at half the level during the boom.

If the government was going to intervene anywhere to fix bank lending, then surely this is where its efforts should have been focused. Sure, from a pure free- market perspective, it might be better to let nature take its course in the housing market. But if the mortgage famine continues, the situation in the U.K. housing market will resolve itself in one of two ways: either the market will correct itself so that prices fall back in line with their long-term three times multiple of average earnings, compared to 4.6 times today, according to Halifax data. A drop of that order would have a severe impact on confidence, triggering a double-dip recession, rising unemployment, mortgage delinquencies and a new wave of bank losses.

The alternative is that the housing market continues to operate as it does now, with home ownership increasingly reserved for those families with sufficient housing equity to make transfers between generations. Last year, more than 80% of first-time buyers had financial assistance, according to the Council of Mortgage Lenders. Those without family money will be doomed to rent, reversing one of the greatest social achievements of the last 60 years and widening an already alarming increase in inequality.

From a political perspective, these are not outcomes that anyone would want. And unlike the questionable demand for business lending, the demand for higher loan to value mortgages from desperate first-time buyers is real. Yet mortgage lending was never raised during the Merlin negotiations. A crucial opportunity went begging.

Instead, the U.K. will be presented with a bunch of PR gimmicks, while the government tries to hide its embarrassment behind an ill-judged tax that will further damage the country's biggest export industry. Joined up government? I don't think so.

Write to Simon Nixon at simon.nixon@wsj.com