Warning over low-cost mortgage from Lloyds
Borrowers have been urged not to fall for mortgages that offer an initially low rate as they could end up being more expensive in the long-run.
A new three-year fixed-rate mortgage from Lloyds TSB offers an introductory rate of just 2.59% - the cheapest rate on the market. However, this rate only lasts until February, when it increases to 5.59%.
Lloyds TSB says the Easy Step mortgage, which is available to people who have a deposit of at least 25% to put down, is designed for homebuyers who need extra cash within the first few months of buying to meet removal costs.
It estimates these can add up to at least £3,850. "Upfront costs such as legal fees or stamp duty can discourage potential buyers from making that purchase,” says Stephen Noakes, commercial director of mortgages at Lloyds. “The low initial payments of the Easy Step mortgage give the option of some breathing space to get on top of these costs.”
However, mortgage brokers say the mortgage does not offer borrowers good value.
“The concept of people paying a lower rate at the start in order to meet moving costs is flawed and will only appeal to people who don’t think it through,” says Ray Boulger, senior technical manager at John Charcol.
He recommends that anyone considering a tiered product such as Lloyds’ Easy Step mortgage, work out what the average rate is: “If this is competitive, then it’s worth considering. If it isn’t, you should look elsewhere.”
The average rate on the Easy Step mortgage is actually slightly tricky to calculate; the initial low rate lasts until 28 February 2010, but the length of time borrowers receive this will depend on when their purchase completes. According to John Charcol, the average buyer should factor in around four months from when an offer is made before they complete.
However, Lloyds says borrowers will pay just 2.59% for at least three months, even if they complete after December this year.
Assuming they don’t benefit for any longer, someone borrowing 75% of the value of a property will pay a rate of 2.59% for three months, rising to 5.59% until 31 October 2012 (33 months).
According to mortgage broker London & Country, this works out as an average rate of 5.34%.
The best three-year fixed-rate mortgage available up to 75% for purcahses is currently offered by Royal Bank of Scotland, with a rate of 4.39%. In addition, Lloyds offers a standard three-year fixed-rate mortgage available up to 75%, which is priced more competitively at 4.99%.
“The average rate of Lloyds' Easy Step mortgage means it wouldn’t even make it into the top five best three-year fixed deals,” says David Hollingworth, mortgage expert at London & Country. “The total cost of the deal over three years will far outweigh any value in the short-term saving in the early months.”
While this deal is designed to help homebuyers cope with the initial costs of purchasing a property, Boulger questions why someone with a 25% would be prepared to pay more in interest for this feature.
“Moving costs are expensive, but normally don’t add up to more than 4% of the purchase price,” he explains. “If someone has scraped together a 25% deposit, then they can probably find this money too.”
He adds: “This is a rotten deal and is extremely poor value for borrowers.”
The Easy Step mortgage is also available to people with 40% deposits, and has a slightly lower initial rate of 2.49%, rising to 5.49% for the remainder. This works out as an average rate of 5.24%.
Both mortgages include a fee of £995, and are only available through Lloyds TSB branches.
Responding to the criticism, a spokeswomen for Lloyds says: “This mortgage offers another option for borrowers who need breathing space after the move. It sits alongside our standard homebuyer mortgage range.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.