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Now is the ideal time for young first time buyers to get on the housing ladder, according to research from Lloyds TSB.

In a survey conducted by the bank, 70% of parents with children over the age of 18, said now was the right time for their children to buy rather than rent.

The research also showed that one in four of these parents (23%) plan to use their savings to help their children buy their first home and, on average, they have a total of £41,000 saved in order to provide financial assistance to all of their children.

After a rapid decline of first time buyers during 2008, the number returning to the market is gradually beginning to increase. In January 2009 there were 8,600 first time buyers compared to 19,200 in August. In the second quarter of 2009, first time buyers accounted for two in every five (38 per cent) house purchases (1).

One of the reasons first time buyers are increasing in number is affordability as Stephen Noakes, commercial director of mortgages, Lloyds TSB, explains. "The current housing market presents a real opportunity for first time buyers, as long as they are ready to buy with a deposit. Housing affordability is back to the level it was in 2003, so many parents with grown-up children want to help them take advantage by using their savings."

The survey from Lloyds TSB showed that helping each of their children equally is very important to parents, with 93% intending to provide the same financial assistance to all of their children.

Herein lies a problem because providing money for deposits on houses or flats can easily account for a large chunk of savings – possibly ₤50,000 plus if there is more than one child to cater for.

Given that there are real concerns that UK savers have under-funded their pensions, there is a real danger that parents may be using money that would otherwise have made life a little more comfortable in retirement. Of course it may be the case that the parent is repaid in full by their son or daughter as their salaries and prospects improve but there is no guarantee that this will happen. As the children are highly likely to outlive the parent there is a strong likelihood that any money used for deposits will effectively remain tied up in the child’s property investment.

Mortgage providers are looking at ways to encourage parents to help out their children in the housing market without tying up large chunks of money indefinitely. Lloyds TSB has unveiled its three year product, called ‘Lend a Hand'. It offers first time buyers a 95% loan to value mortgage, at 4.99%, by taking a legal charge on a savings account belonging to their parents. Parents retain ownership of their savings while earning a competitive fixed interest rate of 4.00% and, at the end of three years, their savings are returned.

According to Lloyds TSB the appeal of the product is that parents are more likely to provide financial assistance if their children could secure a mortgage that allowed their savings to be returned with interest. And this type of mortgage also lets parents recycle their savings to help their other children.

Ray Boulger, senior technical manager at John Charcol is broadly in favour of the product. “Borrowers are getting a better rate with this product – effectively they are getting the typical rate you would associate with a 75% mortgage. Also I think more first time buyers are going to qualify for a mortgage with this than for a standard 95% mortgage.”

He adds: “But you have to remember that money is at risk, in the event that the purchaser defaults on payments and the property is sold at a loss. However I would suggest that in most cases families will know that their child is responsible and loans like these might be far more preferable to just handing the child a cash deposit. It is also worth bearing in mind that after three years, if property values have fallen, the loan to value might be higher so not all the savings will be protected. But I would suggest if anything property prices will start to rise over the next year. I think it is an interesting product which is attracting a decent amount of interest.”

David Hollingworth at London & Country Mortgages takes a similar line to Boulger. “At the moment first time buyers are not realistically going to get a 95% mortgage – to just get into conversation with a lender you will have to have a 10-15% deposit. With products like this from Lloyds, the additional security offered by the parents means the buyer is getting a decent rate on their loan. Also the parent, despite the fact that the money is tied up for three years, is receiving a perfectly reasonable rate on their savings.”

He adds: The alternative scenario to mortgage deals like this is that the parent has to gift money to their child. Can they afford to and do they want to? What if their child is buying with a boyfriend or girlfriend they do not entirely trust do they really want to hand over large amounts of cash?”

Whilst Hollingworth is largely supportive of the Lend a Hand product, he questions the tone of Lloyds TSB promotional material which talks of ‘real opportunities’ for first time buyers in terms of property prices.

“Prices may have come down a little but the bottom line for buyers is to take a measured approach. There is no rush to buy and even allowing for the possible end to the stamp duty holiday, homebuyers should focus primarily on buying the right property for them at a price that they can afford.”

Top tips for getting your children on the property ladder

• Look at the different mortgages available for first time buyers and how your financial assistance can best be used.
• Work out how much money you can afford to use to assist your child with purchasing their property and decide whether it is a gift or a loan to your children.
• Review all of your savings and investments to establish where is most cost effective to take your money from
• If possible, access lower interest paying accounts and those where you won't have to pay a fee to access money.
• Try to avoid emptying your ISA, or other tax efficient investments which you have locked up.
• Sit down as a family and be clear how much you are providing for your child and under what terms.If you are providing a loan, agree over what period you would like it to be returned and agree up front if any interest will be charged.
• If your savings will be linked to your child's mortgage, make sure you seek independent legal advice. For example, what will happen to your savings if your child falls behind on their mortgage payments.