Money Insider: Zero per cent mortgage rate: where's the catch?
Friday 12 July 2013
When the press release detailing the latest mortgage products from Leeds Building Society landed in my inbox this week, it grabbed my attention when I saw that the home loans were being offered with an initial 0 per cent interest rate.
Although 0 per cent borrowing is now commonplace when it comes to credit cards, it is not a feature that you expect to see associated with a mortgage.
I was immediately suspicious and thinking this was just another gimmick that would end up hitting the customer in the pocket. However I’m happy to confess that my initial suspicions were unfounded.
So what’s the 0 per cent interest all about?
You can apply for a new “Welcome” mortgage with Leeds Building Society for either a three or five-year term, with the option of an interest-free period for the first three or six months.
This means that during the initial three or six months your monthly repayments are much lower – thus giving you some extra breathing space in your budget at a time when it could come in very handy.
Maybe you need to replace a couple of carpets or carry out some minor DIY projects to put your mark on your new home. From my own experience, when you move house it always seems to result in a fair amount of additional expense, often for things you hadn’t budgeted for.
I’m sure you’re thinking the same about the 0 per cent offer as I was originally, that there’s bound to be a sting in the tail, but having read through the details of this deal at least three times I can assure you there isn’t.
Currently Leeds Building Society offers standard fixed rate mortgages at 80 per cent, 85 per cent and 90 per cent loan to value (LTV), but even if you opt for the 0 per cent interest option, the amount you repay in interest is virtually the same as it is with the standard mortgage.
So in practical terms, how exactly does it work?
Well, if you took out a standard, three-year, fixed-rate mortgage of £150,000 at 80 per cent LTV, the interest rate would be 3.45 per cent, your monthly repayments £746.27, and the total interest payable over the three-year term is £10,327.
If you took the new “Welcome” version of the same mortgage, your repayments for the first three months whilst interest free would be £500 (£246 less) and for the remaining 33 months they would be £770.73 (£24 more) per month, but the total interest payable is just £1 more at £10,328.
While some people will stick to a standard mortgage product, I’m sure others will see the attraction of making lower repayments over the first three or six months. It’s not going to cost them any more by doing so, plus it gives them a bit more cash in their bank account and some flexibility to help cover some of the additional expenses you always face when moving into a new home.
The interest rates on these Leeds Building Society mortgages are not top of the best buy tables, so you could seek out a slightly cheaper deal over three or five years, but they’re not too far off.
These mortgages are available for purchase only (not remortgages), they allow 10 per cent capital repayments each year without penalty, and come with a free standard valuation up to £335. There is an application fee payable of £199.
It is refreshing to still see innovation in the mortgage market and a loan which is designed to offer flexibility to borrowers without any hidden catches or additional costs.
The Welcome mortgage won’t appeal to everybody, but there is definitely a place for this product which offers something a bit different from the vast majority of home loans.
Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk
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