News broke last week that Nationwide, the world’s largest building society, has introduced a mortgage interest rate of 0.99%, making it the lowest five-year fixed rate deal in history for the UK.
For many this will have come as welcome news, following a period when many first-time buyers have struggled to get a foot on the ladder. In fact, according to recent statistics* the average age of first-time buyers now stands at 34, compared to the 1960’s when the average age was 23.
The announcement draws a definitive line in the sand for mortgage lenders following a period of uncertainty caused by the pandemic, and seemingly puts the power firmly in the hands of the consumer.
But is this new five-year fixed deal as good as it first appears?
Here, mortgage expert James Caplan, Managing Director of leading London financial services firm, First Financial, speaks about Nationwide’s new interest rate, including who is set to benefit, and who will have to look elsewhere for the best deal for their circumstances.
James explains: “Last week Nationwide launched a five-year fixed mortgage deal at 0.99%, making it the first time in history that interest rates on a five-year deal have ever dropped below 1%. On the surface it has the potential to save people a huge amount of money.
“While this is great news for people looking to buy, or even move up, the property ladder, there are a number of really important fine-print details that people need to be aware of. For starters, the rate will only be beneficial to a hand full of people who fit the criteria.
“Eligible candidates will need a substantial deposit or equity in their existing home – as well as a sizeable mortgage to begin with.”
James explains that the deal is available to both those looking to re-mortgage, home-movers and first-time buyers. However, he points out that a minimum of a 40% deposit or 40% equity in the current home is needed to meet the criteria for the deal.
This means that anyone interested in taking advantage of what Nationwide have to offer must consider their ‘Loan-to-Value’ requirements.
James said: “The Loan-to-Value ratio is the amount of money you intend to borrow vs the value of the property. For example, if the house is worth £500k, and you need to borrow £250k, your LTV will be 50%. When it comes to the Nationwide 0.99% mortgage deal, the LTV cannot be greater than 60%.
“That means buyers need to have a whopping 40% deposit. In some cases here in London and Middlesex, that could be anything upwards of £300k.
“Sadly, that is likely to rule many first-time buyers out on this occasion. However, it does mean that anyone who is already on the property ladder – and especially those who are looking to potentially downsize – could really benefit.”
James added that there were other key matters to take into consideration.
“In addition to the LTV restrictions, the Nationwide deal means you’ll need to borrow between £275k to £1 million when purchasing as a home-mover or an existing borrower or switching rates.
“As a re-mortgage client, you will need to borrow between £300k to £1 million.
“Finally as an existing borrower, if you are switching rates and applying for further funds simultaneously, you will need to borrow between £5k to £1 million to access this rate.”
“Buyers also need to know that the value saved on interest rates should only form part of the decision-making process when choosing the right mortgage deal for them.”
Most mortgage deals only allow customers to make over-payments of up to 10% each year. “If you want to pay off more, you need to check whether the penalties outweigh the cost savings you could potentially make on a lower interest rate.”
James goes on to explain that people should also take the product fees, as well as the rate, into account. He said: “To get Nationwide’s rate-deal you need to pay a product fee of £1,499.
“The product fee is known as the lender fee, which home-movers, re-mortgage clients and existing borrowers looking to purchase are charged. For existing borrowers and customers of Nationwide who are switching rates or applying for a further advance, the fee will stand at £999.
“For existing borrowers who are switching rates and applying for a further advance simultaneously there will be no lender fee.”
James concludes that while the Nationwide deal is a welcome addition to the current mortgage product market, anyone looking to take advantage of the sub-1% rate should speak to an advisor about whether there is a better option out there.
He said: “Anyone who is debating Nationwide’s rate-deal to consider the aspects highlighted, but also to weigh up all of the other product facts.
“Do they want to pay the product fee, do they have enough equity to meet the 60% LTV ratio and do they want to be locked into a deal for five years?
“A mortgage advisor can also help determine what is the right decision for right now, as well as any future plans that a home buyer might have.”
For further mortgage or financial advice, please contact James or a member of the First Financial team.
James Caplan is the Managing Director of First Financial – a leading London-based financial services firm working across a diverse portfolio of clients including individuals and businesses which was established in 1997.
He has more than 20 years’ experience and a breadth of experience in arranging residential and commercial finance as well as lifetime mortgages, insurance and critical illness cover.
James is available for interview with both broadcast media and newspaper journalists who are looking to discuss topics relating to the property market and mortgages.
James is particularly knowledgeable on topics including: fluctuations in LTV rates, first time buyer purchasing patterns, upcoming trends in the market, the impact of the Covid-19 pandemic and the increase in the number of holiday homes.
He can also comment on the impact of Covid-19 on the housing market, changes to the mortgage application process for the self-employed, the impact of an ageing population on the housing market and the impact of widespread remote working practices.