Of course, as every adviser knows, there is no such thing as a free mortgage. After the six months, Leeds ratchets up the interest rate to more recognisable levels. But, at a time when the mortgage market badly needs creative products, is this a genuine example of market innovation?
For this week’s Marketwatch, our commentators are:
Leeds Building Society general development manager Martin Richardson, who says the products offer borrowers flexibility and competitive prices
Capital Fortune business manager Rob Killeen, who argues rolling up interest rates significantly increases the cost to the borrower
Which? money editor Gareth Shaw, who suggests it will be difficult for borrowers to adequately compare the products with others in the market
Martin Richardson, general development manager, Leeds Building Society
The cost of buying a home is not limited to finding a deposit or being able to pay the mortgage, and when people buy a new home, they want to make changes and put their own personal mark on it.
These products allow borrowers to choose a 0% interest rate period and pay capital only, for either three or six months, reducing their outgoings immediately and providing the opportunity to decorate, make improvements or buy furniture for their new home. They then pay a fixed monthly payment for the remainder of the product period at a competitive and affordable rate, creating flexibility and certainty at the same time.
They support borrowers in the early months in their new home. Depending on the size of the mortgage and the 0% period, borrowers can initially reduce their outgoings by thousands of pounds, allowing them the flexibility to improve their property and manage their cash flow. Furthermore, their monthly payment after the 0% period does not increase significantly compared to a standard fixed-rate product.
The Welcome range is priced broadly the same as our standard range. Borrowers can calculate payments online and the Key Facts Illustration clearly sets out the total costs and monthly payments during the 0% interest rate period, the remainder of the product term and beyond.
Rob Killeen, business manager, Capital Fortune
While Leeds should be applauded for its own attempts to reignite the first-time buyer market there by increasing mobility throughout the housing chain, the real issue has to be whether the offer of 0% interest for up to six months, is a ‘genuine market innovation’ or perhaps, an illusory move.
Genuine market innovation can only ever be provided by the launch of highly competitive mortgage products founded on their fundamental clarity regarding the overall cost to the consumer. The product discussed is far from 0% and respectfully, falls foul of this test.
The product does offer a good degree of flexibility to borrowers, providing an initial break from paying the mortgage. It is not however a 0% mortgage and there is a cost. Whilst Leeds is clearly attempting to support the first time buyer market, the innovation of this product may have been overplayed.
Gareth Shaw, money editor, Which?
It’s good to see some innovation in the mortgage market. This deal could be good news for borrowers giving them a welcome breathing space in the early months of moving house – a time when they may have other significant costs such as decorating, furniture and moving.
However, while this arrangement may suit some people, borrowers are really just deferring payments until a later date so this deal should be viewed as a payment holiday rather than interest-free.
In addition, it’s going to be very difficult for borrowers to compare this product directly with other mortgages. Our research has found that this is a common problem across the mortgage market, with increasing arrangement fees, and varying interest rates and timescales making it harder for borrowers to understand and compare the overall cost of a mortgage.
The best way for borrowers to ensure they are getting the best deal is to take independent mortgage advice from professionals, but it should also be easy for them to compare deals and make their own decisions. This is an issue Which? is currently exploring – including looking at new, consumer friendly ways to compare deals.
