Money latest: ‘Dangerous’ sub-1% mortgage launched for new homes | UK News

A mortgage that could see people paying less than 1% interest initially for a new home has received a mixed response – with one expert calling it “dangerous” and a “mousetrap”.

Own New, which is funded by housebuilders, has teamed up with Virgin Money and Halifax for a scheme they’re calling Rate Reducer. Other lenders are set to join up.

Initial mortgage repayments are reduced because the lender invests homebuilder incentive budgets into the mortgage upfront – typically up to 5% of the property purchase price.

The example given in the press release is that for a new home worth £300,000, the introductory two-year mortgage rate of 4.79% at 65% loan-to value (LTV) would be cut to 0.99% at 60% LTV.

Own New founder Elliot Darcy said: “Our ethos is to make home ownership and mortgage lending in this country open to more people and we are confident that the launch of the Own New Rate Reducer will achieve that.”

He said it would be a “significant boost to many people’s home-buying dreams”.

However, many of the industry experts Newspage spoke to were sceptical.

Stephen Perkins, MD at the brokers Yellow Brick Mortgages, summed up the sentiment…

“The cheese is placed in the mousetrap with this scheme. Big headlines and posters proclaiming ‘own this home from as little as £x a month’ based on the largest deposit and discounts will no doubt generate interest and purchases from buyers who would be paying more per month for a second-hand property. 

“However, this is a dangerous scheme in that buyers will get used to the lower payments and when that initial product ends they will be faced with a large increase in their payments. 

“The slightly quicker reduction of the capital balance will unlikely put them in a lower loan-to-value banding to offset that increase.

“Ultimately, though, like the Help to Buy scheme that preceded it, this scheme will see developers just increasing their house prices leaving the potential buyers no better off at all, whilst also sacrificing the other incentives they would have been able to secure. 

“This may be the best option for some buyers, but need to ensure they are fully aware of the risks.”

Matthew Jackson, director at mortgage advisers Mint FS, said: “Why would lenders and developers sign up to such a scheme? Is it to benefit buyers or themselves? I suspect it is the latter, with the removal of Help to Buy lenders have a huge hole in mortgage lending and developers are struggling for sales. 

“Without a doubt developers will use these affordable mortgages to increase house prices, meaning a premium will be paid for own new stock, and the payment shock at the end of the product will be enormous. 

“Will the buyer be advised correctly? Doubtful. This has disaster written all over it.”

As discussed, a majority of experts quoted by PR platform Newspage were similar to the above, but Elliott Benson, owner at Sett Mortgages, welcomed today’s launch: “Being involved heavily in the first-time buyer market I can see this helping a lot of people get on the ladder as the main factor that affects a decision is the monthly payment and budget as opposed to anything else.”