Leeds launches Innovative Help to Buy 10 Year Fix
Posted on 8 May 2014 by
The launch yesterday by Leeds Building Society of the first 10 year fixed rate Help to Buy 1 (the equity share version of HTB for new build only) product provides an interesting additional mortgage option for purchasers on new build properties who only have a small deposit, especially as it is available on its “Welcome” range, which charges interest at 0% for the first 3 or 6 months, with the subsequent payments increased for the lender to recoup the unpaid interest, but no more than that.
10 year fixed rate mortgages are, and will remain without a radical overhaul, a minority market, for two main reasons:
- Being locked into ERCs for 10 years is too big a risk for most people. In today’s market the risk is far greater than up to 2007 that borrowers will fall foul of their lender’s criteria if they want to move home and port their mortgage, even if they don’t want to increase their borrowing or want to reduce it.
- The interest rates are often, as now, well above the rate on 5 year fixes. However, we have found that 10 year fixes have occasionally sold well in the past, either when the interest rate differential between 5 and 10 year fixes was relatively small, say no more than 0.5%, and/or when ERCs didn’t apply for the whole 10 years or there were windows to redeem ERC free at certain times. (For example Coventry has in the past offered a 10 year fix with ERCs only for the first 5 years and Newcastle once offered a 10 year fix with a window to redeem ERC free during one month every year.)
Having said that, I welcome this innovative mortgage from Leeds B S. There are very few 10 year fixes on the market and no others available on HTB1. This mortgage gives buyers, initially restricted to those buying a Barratt home, an additional choice and although the proportion of HTB1 borrowers who choose this mortgage will be small Leeds, although a reasonably large building society, is still small enough to make it worthwhile to offer this sort of niche product, whereas for one of the larger lenders the potential market would not be large enough to make it viable.
Leeds’ Welcome mortgage range, with its 0% interest rate option for 3 or 6 months, with a compensating higher rate for the remaining fixed rate period, works best on longer term fixed rates as the longer the term to make up the initial period when no interest is paid the less the impact there is on the subsequent payments. (Even during the 0% period monthly payments are still required, as it is a repayment mortgage, but they consist solely of capital repayments).
The combination of no payments for the first 5 years on the 20% of the purchase price funded by the Government’s HTB1 equity share second charge mortgage, plus 0% interest for 3 or 6 months on the balance of the mortgage borrowing, will give borrowers a useful option of very low mortgage payments for a few months while they kit out their new property.
This will leave more income available to finance some of the products that inevitably have to be acquired when buying a new home and so reduce, or avoid, the need to use more expensive alternative borrowing sources to finance these purchases.
Therefore the addition of a 10 year fixed rate to its Help to Buy equity share range is a welcome move from Leeds, with its HTB rates being effectively available at an LTV of 76% (95% of an 80% share).
When comparing HTB1 mortgage options borrowers and their advisers need to consider even more carefully than usual borrowers’ likely options post the initial deal period. Leeds currently offers the market leading HTB1 2 year fix. Even after taking the 3 month 0% interest rate option its subsequent rate of 2.88% for the remaining fixed rate period is lower than the next cheapest HTB 2 year fix, which is 2.94% from Nationwide.
However, most people buying a new property will expect to stay in their new home for longer than 2 years, and anyone considering a 2 year fix should bear in mind that at the moment no lenders are offering viable remortgage options for HTB type equity share mortgages, unless the purchaser repays the equity share. This means those taking a 2 year fix run an above average risk of having few options at the end of the initial fixed rate.
Purchasers with a 5% deposit using the HTB equity share scheme are on average buying properties which are significantly more expensive than those using a normal 95% LTV mortgage, such as the HTB2 mortgage guarantee scheme. This suggests that many buyers using HTB1 are jumping over what would be their normal first purchase and therefore will not need to trade up as quickly as normal to a bigger property.
Whilst 10 years will still be a long time for many buyers to lock into a mortgage deal the fact that many buyers using HTB1 are effectively already trading up with their first purchase (which will also save them a significant amount of moving expenses and the hassle of moving) suggests that on average people using HTB1 will stay in their first property for longer than usual.
Figures issued by the Department for Communities and Local Government for the period up to 31/3/14 show that First Time Buyers (FTBs) accounted for 87.5% of purchases using HTB1 and the CML has compared these figures with the average purchase price of all properties bought by FTBs, although one needs to be cautious about a too direct comparison because many FTB purchases will have been with a deposit in excess of 5%.
The median average purchase price of properties bought with a HTB1 equity mortgage during this period is £184,995, which is 12.1% higher than the median average purchase price of £165,000 for all FTBs. However, the arithmetic average purchase price of properties bought with a HTB1 equity mortgage is significantly higher at £204,639.
These figures are important for many reasons, but in particular because, as mentioned above, the main downside of a 10 year fix, as long as the rate is reasonable, is the 10 year ERC period. Although the mortgage is portable I understand from Leeds it will probable only be portable if the LTV required on the new property is no more than the maximum 76% available on this mortgage. Therefore, my conclusion is that Leeds’ 10 year fix Welcome mortgage offers good value for those who are confident of remaining in their property for 10 years, but others should fix for a shorter term.
Very often with new schemes like this the lender pilots the mortgage(s) with one company, in this case Barratts, often because that company suggested the mortgage to the lender. After an initial period, which also allows the lender to iron out any teething problems (if there are any they are usually IT related) the mortgage then often gets rolled out on a wider basis. Therefore I would not be surprised if in a few weeks time availability of these products is extended to other developers.
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