Low-start mortgages

Within a market all prices are determined by the interaction of the forces of supply and demand. The fall in house prices in the UK was caused by a drop in effective demand for housing rather than a chronic oversupply of property(this was not the case in Spain). The credit crunch caused the housing market to stall as most people do not have sufficient funds to buy a house outright and so need to borrow. But banks became much more concerned about lending and so raised the amount people were required to put down as a deposit. This saw the disappearance of 100% mortgages in 2008(and even 125% mortgages where banks lent more than the entire value of the property). Additionally interest only mortgages without a repayment vehicle have also become niche products.

This changes have made it harder for borrowers without deposits or larger incomes to get mortgages. However several lenders are now offering various forms of low start mortgages. These mean that initial payments will be lower for a limited period.

• Leeds Building Society are offering a Welcome Mortgage. This mortgage means that the interest rate charged on a mortgage is 0% for the first three months. This means individuals have lower payments for the first few months - presumably so they can spend a bit more on decorations, moving costs, etc.

• Clydesdale are offering a Low Start Mortgage which offers three years of an interest only period. After this the mortgage reverts to a normal repayment mortgage.

Both of these mortgages reduce initial payments and so potentially encourage borrowers to borrow larger sums. The impact  is likely to be to increase the demand for housing. Both of these products are quite limited in scope, especially the Leeds mortgage where the interest free period only last a few months. However the mortgage market is competitive and so if these are successful then you can expect variants to emerge from other players in the market. 

The key risk of any low start mortgage is that individuals may borrow more than they are able to, believing that their future income will rise(or expense will fall) and allow them to meet the higher payments. If longer interest free periods hit the market people may also rely on rising property prices to build their equity rather then repayments.