As a 95% interest-only first-time buyer loan is offered, is this a helping hand or a throwback to the property boom's mortgage madness?

Posted on Thursday, March 7, 2019

To some it may sound like a helping hand onto the property ladder, but to others it will seem like a mortgage deal that harks back to the lending madness of the 2000s.

First-time buyers looking to limit their outgoings can benefit from a unique deal, which lets them buy a home with an interest-only mortgage for three years if they put down just a 5 per cent deposit. 

Newbury Building Society's Home Starter mortgage is a 95 per cent loan-to-value deal, which starts as interest-only but then switches to a capital repayment mortgage after a fixed three-year period.

Borrowers with just a 5 per cent deposit can keep their monthly outgoings to an absolute minimum for the first three years they are in their home, but the problem is that monthly payments will then rocket.

The mortgage rate is fixed at 3.8 per cent for the first three years while the loan is set up as interest-only, after that it shifts to a capital repayment mortgage and the building society's standard variable rate, which is currently 4.45 per cent.

The 95% interest-only mortgage 

The society's Home Starter mortgage is fixed at 3.8 per cent for three years interest-only and comes with a £600 arrangement fee. 

Once that initial deal period ends it moves to a capital repayment mortgage and Newbury's standard variable rate, which is currently 4.45 per cent but could be higher then if interest rates rise.

It comes with free valuations, is portable, has a minimum loan size of £50,000 and a maximum loan size of £300,000. 

It also has early repayment charges of 3 per cent for the first two years, then 2 per cent for the remaining fixed term. After that borrowers are free to remortgage.

During the fixed-term period, borrowers are permitted to make overpayments up to 10 per cent of the original loan amount per year. 

There is also the option of a discounted variable rate at 1.01 per cent discounted to the lender's SVR, currently at 3.44 per cent, again with a £600 fee.

This is quite a bit cheaper than the fixed rate deal but is likely rise if the Bank of England shifts interest rates up at in the next three years, as is widely expected.

Again, once the initial three-year period is over, the borrower will be moved onto a capital repayment mortgage and the lender's standard variable rate.

Roger Knight, lending manager at Newbury Building Society said: 'The majority of customers at 95 per cent choose to pay capital repayment from the outset, and the uptake of interest-only has been slow. 

'However, we are comfortable with this because the product has always been seen as an alternative option for the customer.' 

What are the risks? 

There are potential downsides to this deal for borrowers who have not done their homework.

The first and most obvious is that the homeowner will not actually be paying down their loan for the first three years of the mortgage. 

After the initial three-year period, they will still be left with just 5 per cent equity in their property. 

This is more expensive in the long-run and doesn't provide much of a buffer against negative equity if house prices fall.

The second is the leap in monthly outgoings once the three year period ends and the borrower moves to both a capital repayment mortgage and the lender's standard variable rate of 4.45 per cent.


For someone with a £150,000 mortgage on a 30-year term would see monthly payments shoot up from £475 to £796.

The big rise in payments invites comparisons with heavily-criticised 'teaser rate' mortgages, which were a feature of the US market before the financial crisis, and the plethora of banks and building societies in the UK willing to lend interest-only to those with small deposits in the property boom years running up to 2007.

Newbury BS says that it tests affordability based on the capital repayment mortgage at the higher rate.

Nonetheless, this niche mortgage is a controversial product. We take a look below at how it works and what other deals it compares to.