THERE are two new mortgages for first-timer buyers that require just a 5 per cent deposit – and you only need to repay the interest for the first three years.
Experts say the deals, which are being offered by Newbury Building Society to borrowers in the south of England, are the only interest-only mortgages out there requiring a 5 per cent deposit.
Alamy Newbury has launched two interest-only mortgages for first-time buyers
Mortgage expert Ray Boulger, of broker John Charcol, says most lenders don’t offer interest-only loans on mortgages requiring less than a 25 per cent deposit.
An interest-only mortgage is where borrowers only repay the interest over the term.
Since the crash, these loans have been few and far between due to the risk that customers won’t be able to pay off the loan by their time their mortgage expires.
Repayment mortgages on the other hand, where you repay the loan you’ve borrowed as well as the interest, are much more common – especially for first-time buyers.
Where you can live to get Newbury’s interest-only dealHERE are the postcode areas you can live in to get Newbury’s interest-only 95 per cent deal:
AL, BA, BH, BN, BS, DT, EX, GL, GU, HA, HP, HR, KT, LU, MK, NN, OX, PO, RG, RH, SG, SL, SM, SN, SP, SO, TA, TW, UB, WD, WR
What are Newbury’s deals?
Newbury’s deals are interest-only for the first three-years, switching to a repayment mortgage after.
The first deal has a variable interest rate of 3.44 per cent for the first three years, followed by 4.45 per cent after.
In comparison the second deal has a fixed interest rate of 3.89 per cent for the first three years, followed by 4.45 per cent after.
Both have a £600 arrangement fee on top and must have a mortgage term of five to 35 years.
The first deal would see someone taking out a £190,000 mortgage over a 35-year term making monthly repayments of £544 over the first three years, jumping to £929 after.
Alamy But interest-only deals can leave borrowers in negative equity if house prices fall
On the second deal, someone taking out a £190,000 mortgage over a 35-year term making monthly repayments of £616 over the first three years, also jumping to £929 after.
But are the deals any good for first-time buyers? We take a look.It could be a good mortgage for those with debts or who expect a pay rise
The benefit of an interest-only mortgage for the first three years is that monthly repayments will be lower at a time when you’ve already had to shell out a lot on buying a home.
Mr Boulger says lower initial repayments could also be helpful for people with expensive debts or for those expecting a pay rise.
He said: “The mortgages could be good for somebody with expensive debts. As by having an interest-only mortgage at a rate that’s lower that other debt, it frees up cash to repay debts.
What help is out there for first-time buyers?GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move.
Help to Buy equity loan – The Government will lend you up to 20 per cent of the home’s value – or 40 per cent in London – after you’ve put down a five per cent deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25 per cent on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25 to 75 per cent of the property but you’re restricted to specific ones.
“First dibs” in London – London Mayor Sadiq Khan is working on a scheme that will restrict sales of all new-build homes in the capital up to £350,000 to UK buyers for three months before any overseas marketing can take place.
Starter Home Initiative – A Government scheme that will see 200,000 new-build homes in England sold to first-time buyers with a 20 per cent discount by 2020. To receive updates on the progress of these homes you can register your interest on the Starter Homes website.
“It may also be good for those who know their salary will increase sharply in next three years or those with expensive commitments now, such as a baby.
“This is because while they may be cash poor now, they should be in a better place when the higher repayment rate kicks in.”
But the mortgage could leave people in negative equity
But there are also downsides to interest-only deals – the most obvious being that the longer you put off making capital repayments, the more you’ll likely pay overall as it’s taking you longer to clear your debts.
You may also find it difficult to remortgage to a cheaper deal at the end of the three years as you may be left with negative equity – where your house is worth less than the mortgage.
Rachel Springall, a financial expert at comparison site Moneyfacts, said: “As borrowers will only own a small portion of their home, this could prove a problem down the line if house prices were to decrease as they could then find themselves in negative equity.
“Still, after three-years if borrowers want to switch mortgage deals they can do so without penalty, but as they will still only own a small percentage of their home, finding a cheap deal might prove difficult and they may end up stuck on the revert rate.”
There are cheaper alternatives
There are cheaper alternatives out there for first-time buyers. Melton Mowbray Building Society, for example, has a three year fix at 2.79 per cent with no product fees and £250 cashback – rising to 4.99 per cent after.
Alamy There are other ways to cut monthly mortgage costs – by taking out a longer deal
On the same £190,000 35-year mortgage that’d mean monthly repayments of £710.
You’d also end up owning more of your home after the three years and assuming you remortgaged to a cheaper deal, you’d repay less over the 35-year term.
Mr Boulger points out that other ways to keep down monthly mortgage repayments is to take out a longer loan, although you will of course pay more over the term.
He also says the Help to Buy Equity Loan scheme can help to keep costs down as the larger deposits lent on this type of home by the Government means smaller mortgages.
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