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Nationwide helps first-time buyers with a record low 2.54% rate

But the mortgage is part of the government’s Help to Buy scheme which is new-build only, sparking fears it will fuel another housing market bubble.

Nationwide building society has launched the lowest-ever mortgage rate for first-time buyers, offering a rate of just 2.54% fixed for two years, available to borrowers with a deposit of just 5%.

But the deal is part of the government’s Help to Buy scheme, only available against new-build properties, which, critics have warned, could stoke another round of house price inflation.

The Nationwide deal comes with relatively low arrangement fees totalling £499 (many mortgage fees are now set at £999). You don’t even have to be a first-time buyer to apply. The offer is open to home movers as well, although they pay a fee of £900, and if they already have a loan with Nationwide, the rate drops to just 2.44%.

Buyers can use the mortgage to purchase any property from a developer registered with the Homes and Communities Agency, which is running the Help to Buy scheme.

The way it works is that the borrower puts down a deposit of 5%, then the government issues an equity loan equal to up to 20% of the value of the property. Nationwide then lends the remaining 75%, which is how it manages to cut the rate.

Critics warn that Help to Buy will spark another housing market bubble, and figures from Nationwide this week suggest that the market is gathering momentum yet again, with prices up 0.4% in May. Even Nationwide’s chief executive, Graham Beale, when asked recently about the launch of Help to Buy, suggested it could lead to higher house price inflation.

However, at the launch of the society’s Help to Buy loans, its head of mortgages, Tracie Pearce, said the lender was “keen to support the government’s efforts in helping the mortgage market to move forward”.

The 2.54% two-year fix is just one of three Help to Buy deals on offer from Nationwide. The others are a low-fee deal, where the charges are just £99 rather than £499, but the rate is set at 2.94% (2.84% for existing borrowers) and a three-year fixed rate at 2.64%, or 2.54% for existing borrowers. The three-year deal has a fee of £900 for movers or £400 for first-time buyers, plus a £99 booking fee.

The 2.54% rate beats any other available to borrowers with a 5% deposit, according to financial information firm Moneyfacts, and is less than half that charged on conventional 95% loans. On Nationwide’s existing Save to Buy deal, where borrowers can get a 95% loan if they save into an account for at least six months, the rate is 5.34%.

What does it mean in terms of monthly repayments? If a Help to Buy borrower takes out the Nationwide 2.54% deal and borrows £120,000 over 25 years, he or she will have to pay just £541 a month, compared to £725 using the society’s Save to Buy scheme.

The cheap rate means that many first-time buyers will find it makes sense to buy a new-build rather than rent, although it’s hard to see how the equation stacks up in London’s super-heated property market.

For example, Miller Homes has a development – Unity Quarter in Salford – where prices start at £120,000 and qualify for Help to Buy.

But in London, affordability is beyond the vast majority of first-time buyers. Taylor Wimpey, for example, allows Help to Buy across all its developments, but prices at its West Hampstead development start at £1.4m while in Camden the starting price is £879,000, both above the maximum £600,000 government limit for Help to Buy, and way beyond the income multiples lenders will allow. But further out in Barking, in London’s East End, Taylor Wimpey has Help to Buy one-bed flats starting at £139,000.

The equity loan from the government must be between 10% and 20% of the property’s value, and is only repaid when the property is sold. After five years, the loan starts to attract interest.

Will the Nationwide deal be available for long before all the money is snapped up?

Nationwide would not reveal how many loans it would make available at these rates, but a spokeswoman says: “As with all new-build sales, we have limits on the amount of homes we will mortgage; this is assessed on a site-by-site basis and Help to Buy products will be subject to those existing limits.”

Several other large lenders already offer Help to Buy loans, including Halifax, NatWest and Barclays through its Woolwich arm. Barclays is offering 3.89% for three years with a £299 fee. NatWest has two fee-free deals at 3.15% and 3.59%; the second of those is a five-year fixed rate.

Halifax is charging 3.19% for two years with a £999 fee, or 3.59% if you want to avoid upfront costs. However, Halifax’s deal does come with an offer to pay up to £2,500 in stamp duty for first-time buyers who take out a loan before 7 July.

“Nationwide has come out with a very competitive offering,” says Andrew Montlake, director of mortgage brokers Coreco. “Having a big lender like this coming in will help to support the scheme and bring more competition into the market.”

As well as Nationwide’s Save to Buy, there are other 95% mortgages available outside Help to Buy, but all involve getting parental backing or committing to a period of saving before applying for the loan, and rates are generally above 5%.


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