Lloyds TSB has revealed plans to launch a 95% loan-to-value mortgage for first time buyers (FTBs) that is topped up by a loan from their council.
The bank already offers a FTB mortgage that allows buyers to move with a small deposit that is topped up by a helper – usually parents or other family and friends.
And buyers will now be able to buy a home from the property market with just a 5% deposit in a pilot scheme that could be rolled out across the UK by the end of this year.
Local authorities that have already signed up include Blackpool, Warrington, Newcastle-under-Lyme and East Lothian.
Authorities will agree where in their areas the scheme will be available, with councils topping up buyers' 5% deposits with an additional loan of up to 20% of the property's value.
Unlike shared equity schemes, buyers will own the whole property.
It means that despite only being able to raise a small deposit, the additional equity provided from a council loan will allow FTBs to pay lower mortgage rates, equivalent to as low as 75% loan-to-value.
Councils could take a hit if buyers fall into default, but they are expected to benefit from generous rates of interest on their loans in return for stumping up a sizeable chunk of equity.
Lloyds has said that it is happy for the 'Local Lend a Hand' loans to vary from £25,000 to £350,000 with individual authorities making the final decision on caps.
The bank says that the scheme shows it is making an effort to act on calls for first time buyer innovation.
High requirements for deposits, steep rates at high loan-to-value levels and a general tightening have hampered FTBs since the market crashed in 2007, with help from parents being the only viable option for many.
"We know that a lot of young people turn to the Bank of Mum and Dad to get their foot on the ladder, but that's not a solution for everyone," Stephen Noakes, commercial director of mortgages at Lloyds TSB, commented.
"By developing Local Lend a Hand and working with local authorities across the UK, we're broadening the prospect of home ownership to even more first time buyers.
"Helping people to buy their first home is crucial in achieving and maintaining a sustainable housing market. With Local Lend a Hand, we're taking our existing Lend a Hand product to another level and addressing the real challenges first time buyers' face."
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