As first time buyers continue to struggle to get onto the first rung of the housing ladder, largely through being unable to raise sufficient deposit to meet lenders maximum loan to value levels, various solutions have been suggested to offer financial help and support to this sector of the housing and home owner loan market.

Many of these solutions involve parents taking on a responsibility for the loan in the form of a guarantor, or helping their children by giving them the required level of deposit from their own savings.

Whilst this is all well and good for those parents who have sufficient savings, many parents simply do not have the necessary level of savings to give to their children, or if they have, they may require them for their own financial plans, such as retirement planning.

Another solution which a number of lenders are now taking on board is that of a top up loan. This is an unsecured loan which is taken out by the parents of a first time buyer in order to provide a large percentage of the required deposit and allow their children to get a home owner loan for 80 per cent loan to value, making this a much cheaper loan option than a high loan to value product.

Hitachi Finance were the first to launch this type of product which offers parents a cheap loan of up to 15 per cent of the required deposit amount, at a rate of just 5.4 per cent for 12 years. These unsecured loans are only available to parents with a good credit history.

Although this is a way of parents to help their children, many feel that this type of loan is placing a risky burden on parents, as they are solely responsible for the loan repayments and could end up damaging their own credit rating in order to help their children, if they default on the loan.

The amount of credit being taken out by consumers in the UK has seen a dramatic decline over the course of the past twelve months, with all areas of credit apart from new car loans showing a decrease in new business throughout last year.

The news comes from the latest figures from the Finance and Leasing Association (FLA), which show that over the course of 2010, people in the UK were either avoiding taking out new personal loans as well as other forms of credit, or they were being declined for the loans they were applying for.

Spending on credit cards dropped by 7 per cent during last year, as did the amount spent on store cards. The number of new personal loans being approved, fell by a staggering 24 per cent, according to the figures from the FLA.

The only area of credit to see an increase in new business was in the car loan sector, which saw new loans increase by 9 per cent. Without this area of loan growth, the personal loan and consumer credit sector would have shrunk by around 10 per cent overall throughout the course of 2010.

Even December saw a significant decline in new loans and credit, at a time when the loan industry generally expects to see an increase in new business.

Fiona Hoyle of the FLA said “These figures confirm that there is no such thing as easy credit. Stricter lending requirements under the new EU consumer credit directive mean that some consumers are finding it harder to access credit. Low consumer confidence is also a major factor in this fall in lending.”

“Against this backdrop of reduced lending and declining consumer confidence, the government needs to be careful not to regulate some kinds of credit out of the market.”

For several months now, there has been a growing rate war amongst loan companies to see who can offer the cheapest unsecured loan product, although the best cheap loan deals have been largely for loans in excess of £7,500, with smaller loans still remaining expensive in comparison.

But it would now appear that the loan rate war is being extended to smaller unsecured loans, as well as large loans, as a recent survey has found that the average interest rate being charged on small loans has fallen significantly in the past couple of months or so.

The new research from Moneysupermarket.com, has found that the average interest rate on an unsecured loan of just £3,000, amongst the top ten providers, has now fallen to 14.39 per cent, which is the lowest rate for this size of loan since November 2009. Similarly, the average rate on a loan of £5,000 has also fallen to 10.02 per cent, which is the lowest rate since June 2009.

Although this is good news for potential borrowers, the cost of a personal loan in general and unsecured loans specifically, are still considerably higher than they were prior to the start of the credit crunch and although loan rates are moving in the right direction, an increase in the Bank of England base rate could soon reverse this trend.

Tim Moss of moneysupermarket.com said “At long last, after a period of inactivity, we are starting to see the whole personal loan market starting to open up. Many lenders are beginning to open their books to more consumers and we are seeing more competitive deals, even for loans below £7,500.”

“Having an open and competitive loans market is vitally important as it provides another option for consumers who may have been forced to look at other more expensive borrowing when banks tightened up their lending criteria.”

It has been a while now since the sale and rent back sector of the housing and home owner loan market was regulated by the Financial Services Authority (FSA) and as a result of this, things have been fairly quiet on this front since then.

However, a recent investigation into the advice regarding sale and rent back schemes, which is being given to home owners struggling to pay their home owner loan, has described the majority of advice as “woefully inadequate”.

Sale and rent back schemes are designed to help home owners who are in loan arrears on their home owner loan or mortgage and are facing the possibility of repossession due to defaulting on the loan.

They allow a borrower to sell their home to a company, usually at a reduced price, and clear the outstanding debt on their home owner loan, then rent the property back from the same company, thereby allowing a person to remain in their home.

After several horror stories and cases of people taking out such a scheme and ending up losing their home anyway, without getting anywhere near the market value for their property, the FSA introduced regulation for the sector and now any firm operating such a scheme must be authorised to do so.

A recent investigation conducted by Which? into the sale and rent back sector, found that out of 17 advisers which were contacted across 9 different firms, only 2 individuals actually gave suitable and adequate advice.

Many advisers did not discuss the various loan options for customers and just gave an immediate quote for the sale and rent back scheme, which is supposed to be a last resort product. Two companies were actually reported to the FSA for their failings.

Peter Vicary-Smith of Which? said “It’s simply not acceptable that people are receiving shoddy advice about such a huge financial decision. The FSA must tighten the screw on these firms to make sure the rules are followed and consumers are protected.”  

Recent pay freezes, coupled with rising food and fuel costs and an increase in the VAT rate, have left many consumers struggling even more than ever to keep on top of their regular monthly bills, especially their personal loan and home owner loan commitments.

But with the latest predictions from the Bank of England that there could be up to three increases in the base rate of interest for loans before the end of this year, things could become even worse for many borrowers, leaving some individuals in the situation where they are unable to manage their loans and other debts.

One debt solution company, Atlantic Financial Management, has warned borrowers who find themselves in this situation that they should prioritise their debts to ensure that the most important ones are maintained, in order to stop people potentially losing their homes.

Many individuals do not know how to place their debts in order of importance and Atlantic have advised borrowers to ensure that their home owner loan or mortgage and any secured loans are at the top of the list when it comes to maintaining repayments.

Although it is still important to keep up with the repayments on unsecured debts, such as personal loans and credit cards, these should take second place behind secured loans, which could cause a borrower to lose their home.

Kevin Still of Atlantic said “For many households, with budgets already stretched, the temptation will be to focus on reducing payments on unsecured borrowing, like store and credit card debts, paying back the minimum. All the time the debt is increasing with interest charges.”

“Whilst these debts must not be ignored, when push comes to shove, meeting increased mortgage repayments must be the first priority ahead of these unsecured debts. There can be nothing more devastating than losing your home and that’s a very real risk when you fall behind on mortgage payments.”