0% mortgage: What's the catch?

A range of new mortgages have been launched with no interest payments for up to six months.

Leeds Building Society has launched several new mortgages with an initial period of 0% interest for either three or six months.

The lender claims that this intial interest-free period will give homebuyers a break from interest payments to focus on other costs. And the overall cost of the mortgage is comparable to most standard deals on the market.  

There is a choice of a three or five-year fixed rate period with the ‘Welcome Mortgages’, which require at least a 10% deposit.



The deal

The three-year mortgage option starts from 3.79% (if you choose the three month interest-free period) while the five-year mortgage has an interest rate of 4.23%.

Borrowers can also choose from a loan-to-value (LTV) rate of 80%, 85% or 90%, while there is an application fee of £199 but no completion fees.

The interest rate and interest-free period changes depending on what option you go for. The table below shows the rates for the three-year fix.

Loan-to-value

Interest rate

0% period

80%

3.79%

Three months

80%

4.20%

Six months

85%

4.28%

Three months

85%

4.75%

Six months

90%

4.71%

Three months

90%

5.22%

Six months

When it comes to the longer five-year fix the rates are slightly higher, but still competitive when looking across the market.

Loan-to-value

Interest rate

0% period

80%

4.23%

Three months

80%

4.50%

Six months

85%

4.66%

Three months

85%

4.96%

Six months

90%

5.08%

Three months

90%

5.40%

Six months

These mortgages are open to anyone – apart from those wanting to remortgage or an interest-only deal – and they will be particularly attractive to first-time buyers.

They are unique because they give new homeowners the chance to have a break from interest payments by lowering their outgoings. That way they can focus on other spending – such as buying furniture and decorating.

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The alternatives

Several lenders have launched market-leading deals for first-time buyers of late, and the market has greatly picked up thanks to the Government’s Funding for Lending Scheme (FLS).

When looking at the entire cost of the mortgage Furness Building Society has a similar deal at 90% LTV for a fixed-rate of 5.2% for three years but you also need to factor in the £995 completion fee. First Direct has a cheaper deal at 3.9% for a 90% LTV for three years and a fee of £999.

In the five-year fixed-rate range for 90% LTV mortgages there are also cheaper deals. Chelsea Building Society has a deal at 4.29% with a fee of £815.97, HSBC offers 4.39% with fees of £824.41 while The Nottingham offers 4.39% and £824.41.

However, Leeds BS isn’t promoting these deals as the market-leading mortgages. Instead it’s providing a unique way to pay back the loan for buyers who may be initially short of cash.



Welcome versus standard mortgage

Another benefit of these deals is that you don't pay a massive premium for the sake of having that initial breathing space. In fact when comparing the mortgage with standard offers from the building society there isn’t much difference.

For example, a £150,000 mortgage at 80% LTV on the three-month 0% deal and a three-year fixed rate would require an initial monthly payment of £500. After the 0% period ends the monthly payment would increase to £770.73. That's £23.46 a month higher than repayments on a standard three-year fixed rate from Leeds BS.

When looking at the entire three-year period the borrower would pay £1 more with the Welcome Mortgage than with the standard deal.

Kim Rebecchi, sales and marketing director for Leeds BS, explained that depending on the size of the mortgage and the 0% period chosen, borrowers could initially reduce their outgoings by thousands of pounds, allowing them the flexibility to improve their property and manage their cash flow.

[In the market for a mortgage? Take a look at the latest rates]