Saturday, August 24, 2013

The First 0% Mortgage Deal in the UK

It is easy to get a credit card these days with numerous introductory offers but recently the Leeds Building Society has launched the "Welcome Mortgage" with a 0% interest rate. It has been approved by the regulatory bodies and given the thumbs up by the experts, but of course many others are asking 'what the catch is?'

The 0% offer is for the first few months and could result in savings of as much as £4,000 or more, which would be a great help to first time buyers also needing to fund removal costs and buy furniture.

There are concerns that this type of mortgage is just tempting people in with a teaser 0% starter rate and is akin to the "adjustable-rate mortgages" that were on offer in the USA and fuelled the massive mortgage crisis there or going further back, similar to the "deferred interest" schemes that used to be
available in the UK, allowing people to put off repaying interest on their mortgages.

There are two options for the "Welcome" mortgage from the Leeds Building Society. There is a three year and a five year fixed rate deal. Both have the option of 0% interest for the first 3 or the first 6 months, then there is a 3.79% interest rate for the 3 year rate or a 4.23% for the five year rate. However, it does not mean there is nothing to pay in those first few months. Borrowers must make capital repayments and of course the interest not paid at the start is factored into the deal for later payments.

The deal by the Leeds Building Society is the latest in various schemes and offers being brought out by mortgage companies. The Governments Funding for Lending scheme has meant easier and cheaper availability of money for lenders and resulted in low mortgage rates and an increase in lending. There are now more high loan to value products available and the total number of loans given this year was up 23% on last year. Banks are slowly starting to ease up on restrictions on lending, put in place when the financial crisis began back in 2008.

Anyone considering getting a mortgage should take independent advice as it may turn out that a low interest rate standard mortgage works out cheaper than this 0% interest deal. For example if someone borrowed £300,000 on a 90% loan to value mortgage for a five year fixed rate period using the Leeds Welcome mortgage, then initially they would be paying £1000 a month of capital only and so saving £715 compared to the standard offer from Leeds on the same type of mortgage. But then after the initial 0% period, the borrower will be paying £1,803 a month, £88 more than someone who had just taken the standard mortgage.

Similarly you can get a five year fixed rate deal from the Yorkshire Building Society on a 80% loan to value mortgage and pay 3.19% interest, this amounts to paying £43,573 on £150,000 mortgage plus there is a £975 fee. With the Leeds Welcome Mortgage the equivalent rate would be 4.5% if you opted to take the 0% interest payment for the first 6 months and would end up paying back £47,809 in total over the 5 years.

Much depends on the borrowers personal circumstances and it maybe lower initial payments suits them perfectly after all the other expenses of buying and moving home.

A spokesperson for Leeds Building Society said that their Welcome products was completely different to the deferred interest mortgage as with their product you were repaying capital from the start and knew exactly what interest rate you would be paying after the interest free period.

This is the first 0% mortgage deal of its kind in the UK, although the Yorkshire Building Society did offer something similar back in 2005 to people who were recently divorced or separated.

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Author: Mohammad Waqas
Mohammad is the founder of WINFOPTC. He loves to spend time with his blogs and loves to help the people over the internet. Read More →

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