The mortgages that help first-time buyers beat Stamp Duty
Filed under: Mortgages
But are the deals any good or are the giveaways simply gimmicks?
Mortgage Advice & Info
For the last two years first-time buyers have enjoyed a temporarily higher Stamp Duty threshold of £250,000, resulting in 95% of them purchasing their first home without being subject to the tax.
But with no last minute Budget reprieve the Stamp Duty holiday will come to an end this Saturday at midnight. Properties bought for £125,000 and under remain exempt, but those buying a home for between £125,001 and £250,000 will be subject to 1% tax on the purchase price, and estimates are that 45% of first-time buyers will now fall into this bracket.
They will need to find an extra £1,250 to £2,500 depending on the size of their property. Not an insignificant sum if your finances are already being stretched to buy your first home.
So it's not surprising that in the last few weeks some of the country's leading lenders – Halifax, Nationwide and The Cooperative Bank - have launched new deals targeted specifically at the very first-time buyers who will now be dragged into the 1% Stamp Duty bracket.
What's on offer?
The deals claim to help ease the tax burden by offering cashback or money saving features that put pounds back in the pocket of the first-time buyer, and are available to those with just a small 10% deposit.
Halifax is offering to by pay half of a first-time buyer's Stamp Duty bill – up to £1,250 – for borrowers taking a specific mortgage with them.
Stephen Noakes, mortgage director at the lender, said: "Now that the Stamp Duty exemption is coming to an end, we're keen to soften the blow of a tax bill at what's already an expensive time."
Nationwide has a similar cashback scheme, which it claims will help 'ease the pain of the return of Stamp Duty', offering £1,000 cashback to borrowers choosing its 2, 3 and 5-year fixed rates.
However, the offer is only available to borrowers who already hold the society's current account (Flexaccount), so its appeal is limited to existing customers, or those willing to change their banking provider.
Finally, The Co-op Bank has launched two deals (a fixed and a tracker rate) that are targeted at first-time buyers who will be impacted by this weekend's tax changes. It works differently to the other deals – there is no cashback but the rates are significantly lower, plus the lender is waiving its arrangement and valuation fees so that buyers save £1,250.
Nobody can argue with saving money, but are the deals as good as they initially appear?
All that glitters...
Of course any initiatives designed to help first-time buyers are particularly welcome at a time when it's hard enough for them to get onto the property ladder in the first place, without an extra tax liability to factor in.
But the devil is in the detail and these offers are only really useful if the deals are competitive once all costs and charges are taken into account.
The Nationwide offer comes with strings attached in the form of a linked current account, plus there is an arrangement fee of £499 that will eat into the £1,000 cashback benefit. However, borrowers do get to choose from a range of fixed deals.
The Halifax offer stands out with its generous no-strings-attached payment of half of your Stamp Duty bill. Effectively this is cashback of 0.5% of the purchase price (up to £1,250), plus the mortgage comes with no arrangement fee, another bonus to tightly-squeezed first-timers.
However, there is a catch. The interest rate on the two-year fixed mortgage is 5.99% which can be roundly beaten, with best buy fixes with a 10% deposit starting from as little as 4.19%. This means that your monthly mortgage payments will be higher with the Halifax deal than with best buy mortgages – over £150 a month higher on a £150,000 mortgage for example.
And there's the rub. Because over time that extra money could wipe out the benefit of the cashback you receive and the perk of having no arrangement fee.
Do your sums
Whether or not any mortgage deal suits you depends on your individual circumstances and your preferences, but it is always wise to work out the total cost of the monthly repayment over a set period, plus any fees, and minus any cashback, to do a genuine comparison between products.
David Hollingworth, spokesperson for London & Country Mortgages, says: "Cashback offers can be worthwhile and help towards the additional costs of buying a home. Of course you always have to factor in the rate as there is no point paying over the odds on your monthly payments just to get some cashback."
Mark Harris, chief executive of mortgage broker SPF Private Clients, agrees: "A number of lenders are offering cashback to help meet the cost of Stamp Duty. It is important not to be dazzled by the 'freebies' but to work out the actual cost of such deals.
"Compare the total cost of the mortgage with what else is available to ensure you really are getting a bargain and don't pay more than you absolutely need to. Otherwise, such a deal could prove to be a false economy."
Mortgages are more complicated than ever before, with lenders using a variety of pricing mechanisms to make up a deal - in other words they are robbing Peter to pay Paul. Because of this it is crucial that you work out the overall cost of the mortgage over a set period to be able to see which deals are really best for you.