A Dutch lender named April is introducing an innovative mortgage product that promises to make homeownership more accessible and affordable for Britons. This Dutch-style mortgage model, a first of its kind in the UK, is designed to reduce the interest rate as the homeowner pays down their loan, offering a significant financial relief over the term of the mortgage.
The Dutch Mortgage Model
April’s mortgage products are tailored specifically for first-time buyers, requiring as little as a 5% deposit to get started. This initiative follows their successful introduction of products for buyers with 15% deposits last November. These mortgages come with fixed rates for periods ranging from five to fifteen years, allowing homeowners to benefit from lower interest rates as they gradually move to lower loan-to-value (LTV) bands by paying down their loan. This feature is particularly noteworthy as it deviates from the typical requirement of waiting until the remortgage period to benefit from reduced rates.
The strategy behind this innovative approach originates from April’s parent company, DMFCO, which has successfully offered similar mortgage products in the Netherlands since 2014 through its lending arm, Munt. Tim Hague, April’s commercial director, recalls their pioneering journey in the Netherlands, highlighting their initial skepticism followed by widespread adoption of this model.
The Cost of Innovation
Despite its appealing benefits, April’s mortgage products do come with upfront costs, including a £195 application fee and a £995 completion fee. However, these costs are offset by the long-term savings in interest payments. As borrowers pay down their loan, they transition into lower LTV bands, starting from 95% down to 60%, each step bringing a further reduction in the interest rate.
For instance, over a 15-year fixed term, moving from an 85% to a 60% LTV band could save a borrower £5,127 in interest and allow them to pay an additional £1,330 towards the principal. This adjustment would see the interest rate decrease from 5.29% to 4.99%.
Additional Perks and Future Prospects
April’s model also accommodates homeowners who believe their property’s value has increased, offering free valuations to potentially lower their LTV bands even further. The company has hinted at the potential for offering fixed-term products up to 40 years, though demand for such long terms is currently limited in the UK.
This introduction comes amid discussions within the UK government about the benefits of Dutch-style, long-term fixed mortgages to support first-time buyers. The UK mortgage market, traditionally reliant on short-term funding models, contrasts with the Dutch approach where mortgages are often backed by longer-term investments like pensions and life insurance.
April aims to eventually draw funding from UK pension funds, though it currently relies on Dutch backing. To make these mortgages more appealing to brokers, April has introduced an annual service fee for advising on these products, incentivising them to support longer-term fixes.
A Growing Trend
April is not alone in its venture into the UK market with Dutch-inspired mortgage solutions. Perenna, another company founded by a Dutch entrepreneur, has received a license to offer 30-year fixed-rate mortgages, challenging the traditional UK mortgage model that typically spans two to ten years.
This shift towards longer-term, fixed-rate mortgages comes at a time when interest rates are in flux, with average five-year fixed rates seeing significant changes over the past year. Despite skepticism from some high street lenders about the viability of longer-term fixes, the evolving landscape suggests a growing appetite for more stable and predictable mortgage payments among British homeowners.