Is the new mortgage from Leeds BS welcome?
Posted on 10 July 2013 by
Leeds Building Society has today launched what it is calling the “Welcome mortgage.” It offers a feature which will appeal to many buyers with modest deposits, a fixed rate but with lower payments for up to 6 months. It is targeted at purchasers with a deposit of up to 20%, with rates available on LTVs up to 80%, 85% and 90%.
Those with a deposit of at least 25% will have access to cheaper rates and in general will have less need for the initial period of lower payments offered by this mortgage as in most cases they could simply apply for a slightly larger mortgage.
This mortgage is available at a fixed rate for 3 or 5 years, for purchases only and it must be on a repayment basis, with monthly payments for the first 3 or 6 months consisting of capital repayments only. Monthly repayments for the balance of the 3 or 5 year fixed rate period will be increased so that the interest not paid in the initial period is paid back over the remainder of the fixed rate term. The mortgages have a low arrangement fee of £199 and a free valuation on properties with a purchase price up to £200,000 or a reduction of £335 for higher value properties.
Many people moving home and needing to borrow at least 80% of the purchase price will scrape together funds for stamp duty land tax and other moving costs as well as the deposit but after moving in often realise that some money either needs to spent on the property, or it would be nice to be able to spend in order to make it more homely.
A fixed rate mortgage with lower initial payments will mean that more funds are available to cover the cost of unexpected items or pay for items which otherwise might not have been affordable. The increase in payments after the initial 0% period compared with what would have been payable if the 0% option had not been taken is relatively modest and importantly Leeds is not charging a premium for this product. The mortgage balance at the end of the fixed rate period will be the same whether or not the initial lower payment option is chosen.
To finance unexpected costs after moving in or items such as new furniture or curtains some people when they move home take out a personal loan or build up credit card debt. With lower initial mortgage payments they may be able to avoid or reduce such unsecured borrowing, which will normally have an interest rate much higher than the mortgage.
Although Leeds is not charging extra for the initial 0% option compared to its normal fixed rates it will be important to compare its fixed rates with those on offer from other lenders. The rates are not market leading but they are all competitive after allowing for the very low arrangement fee of £199 and the free or reduced cost valuation, particularly at the 90% LTV rate.
The 5 year fixed rate is likely to prove the most popular, combined with the 6 month 0% period. Choosing the 6 month 0% option gives borrowers the maximum flexibility and as the interest not paid in the first 6 months is recouped over the subsequent 4½ years, compared to 2½ years with the 3 year fixed rate, the impact on monthly payments after the 0% period is much less with the 5 year fix.
Taking as an example a £200,000 mortgage at 90% the basic rate is 4.79%. Monthly payments on a 25 year term without taking the 0% option would be £1,144. Choosing the 0% for 6 months option initial payments would be £666.67, saving £2,870 over the 6 month period, enough to buy several items for the new property. Payments then increase to £1,202.33 for the remaining 4½ years, which is £58 more than would have been payable initially if the 0% option had not been chosen.
The mortgage allows the normal 10% p.a. ERC free overpayments and therefore choosing the 0% initial rate effectively gives borrowers a cost free option to opt for lower monthly payments for up to 6 months, with the knowledge that if after moving in they don’t have any unexpected costs or additional expenditure they can increase payments to the normal level, or even higher, if they find they don’t have any additional expenditure on the property.
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