What is Rate Reducer?
Rate Reducer is a new mortgage product that does exactly what it says on the tin: it offers reduced rates on mortgages. In some cases, mortgage rates below 1% may be available.
The scheme, launched by finance firm Own New, is open to people who buy a new-build home.
Eliot Darcy, founder of Own New, said at the launch in February: 'Alongside the national lenders and housebuilders who have signed up to the scheme, we believe that Rate Reducer will be a significant boost to many people’s home-buying dreams.'
How does the Rate Reducer scheme work?
Housebuilders often offer buyers incentives with new-build properties - and those perks can include things like paying the stamp duty bill, covering the legal costs of buying the home or including free flooring, for example.
Rate Reducer works by effectively using this incentives budget to slash buyers’ monthly mortgage payments over a fixed term.
Let’s look at an example: If a housebuilder offers a 5% discount on one of its new homes, Rate Reducer would take this sum and offset it against the mortgage interest.
So firstly, it reduces the monthly payments over a fixed term. And secondly, it means that buyers can pay off more of the capital value of their mortgage sooner, because the interest charged on the loan is lower.
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Who is eligible for Own New Rate Reducer?
The good news is that both first-time buyers and existing homeowners can access Rate Reducer.
Darcy said: 'People can benefit from Rate Reducer whether they have a small or large deposit. For some people who already have equity in their home, it could herald the return of the sub-one per cent mortgage deal.
'It will give more people a helping hand - and initial boost - to get onto the property ladder, or to secure that new home that will give them the extra space they need.'
Which mortgage lenders are taking part in the Own New Rate Reducer scheme?
Rate Reducer launched with Halifax and Virgin Money. Lenders Gen H, Furness Building Society and Perenna have also signed up to the scheme.
Amanda Bryden, head of Halifax Intermediaries, said: 'This product gives customers more choice in the way they can benefit from builder incentives and is especially helpful to those who want to see a lower initial mortgage payment as they get set up in their new home.'
Craig Calder, head of secured lending at Virgin Money, explained that Rate Reducer will help borrowers feel happier about buying a home, knowing that they have the certainty of a lower fixed interest rate over the initial period of the mortgage.
He added: 'By using the homebuilder incentive budget to offset initial mortgage repayments, buyers can focus on other costs like furnishings and decoration, to make their house a home.'
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Which developers are taking part in the scheme?
Barratt Developments is the first housebuilder to launch Rate Reducer. And hot on its heels, there are thought to be more than 200 housebuilders either signed up or in the process of signing up. They include Persimmon, Taylor Wimpey, Bellway and Berkeley Homes.
Steve Mariner, sales and marketing director at Barratt Developments, explained: ‘The scheme gives buyers the financial boost they need to get them onto the property ladder.
‘They will be able to compare all the options available to them to make sure they get a mortgage product that is right for them and in their long term financial interests.
What mortgage rates are on offer with Rate Reducer?
Mortgage rates will depend on a variety of factors, such as the housebuilder’s incentives budget, the lender and the size of the buyer’s deposit.
For some buyers who already have substantial equity, rates below 1% could be on offer, said Own New.
Here’s an example from Own New of how a buyer could achieve that with Rate Reducer:
Say the housebuilder offers a 5% incentive and the buyer takes out a £350,000 mortgage on a 40-year term at 60% loan to value (LTV).
The mortgage rate could drop from 4.79% to 0.99% over a two-year term. That could mean monthly payments of £883 - a monthly saving of £756.
That same scenario with Rate Reducer fixed for five years - instead of two - could see the mortgage rate fall from 4.49% to 2.95%. That could see monthly payments stand at £1,243 - a monthly saving of £328.
It comes as the latest data shows that average mortgage rates on overall two- and five-year fixed rate deals increased for the first time in six months between February and March.
According to Moneyfacts UK Mortgage Trends Treasury Report, two- and five-year fixed rates rose to 5.76% and 5.34% respectively.
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How long are lower mortgage rates fixed for?
Buyers can choose between two and five-year fixed terms, depending on the lender’s criteria.
What happens when the fixed rate period ends?
It’s important that buyers using Rate Reducer plan ahead. That’s because they could see their payments increase once the deal ends and they switch to a standard market rate.
With this in mind, buyers still need to meet lenders’ normal affordability assessments to access Rate Reducer. This is to ensure they can afford repayments once the fixed term benefit comes to an end.
Buyers also need to get independent financial advice from a regulated mortgage broker who has completed training to access Rate Reducer.
How do I apply?
Keen to get your hands on Rate Reducer? The first thing to do is to find your ideal home built by one of the housebuilders signed up to the scheme.
The housebuilder will then put you in touch with a specialist mortgage broker, and they will take you through the eligibility criteria and the application process step-by-step.
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