Clydesdale Bank is bucking the trend of lenders opting out of the interest-only mortgage market by offering a new three-year fixed rate range.
However its ‘Low Start Mortgage’ is a variation on the traditional format, which it claims combines the affordability of an interest-only deal with the long term security of a capital and interest repayment plan.
The range is available for new purchases or remortgage and offers an introductory three-year fixed rate period where only the interest on the loan is paid each month.
After this time the rate reverts to the bank’s SVR (currently 4.95%) for the remainder of the term but on a capital and interest basis – saving you from having to hand over a lump sum at the end of the deal.
What’s on offer?
There are four deals available on the Low Start Mortgage depending on what your loan-to-value is likely to be:
|
LTV |
Three-year fixed rate |
Fee (on loans less than £500k)* |
Early Repayment Charges |
|
<60% |
£999 |
5% year one, 4% year two, 3% year three |
|
|
<70% |
£999 |
5% year one, 4% year two, 3% year three |
|
|
<75% |
£999 |
5% year one, 4% year two, 3% year three |
|
|
<80% |
£999 |
5% year one, 4% year two, 3% year three |
*Fee for loans up to £1m: £1,499
The range offers loans to anyone looking to borrow between £100,000 and £1 million that has a 20% deposit or more.
Ray Boulger, from independent mortgage broker John Charcol, told us that this high 80% loan-to-value offering is surprising on an interest-only deal, as the maximum LTV usually offered by most lenders is between 50% and 75%. He also noted that an important feature of the Low Start Mortgage is that everyone will be able to meet the repayment strategy, whereas the strategies normally required on an interest-only deal are so restrictive that few borrowers qualify, even if the LTV they require is quite low.
However, compared to other three-year fixed rates across these loan-to-values, none of the Low Start Mortgages are best buys.
On a three-year fixed rate repayment mortgage you can get a rate of 2.69% on a 60% LTV with Nationwide, 2.69% on a 70% LTV with Virgin Money, 2.69% on a 75% LTV with Yorkshire Building Society or 3.14% on a 80% LTV with Leeds Building Society. So in comparison the Low Start Mortgages are between 0.4% and 1.35% more expensive than the market leaders in each range.
But Boulger explained this is down to how unique the product is: "The trade-off for a lender is that if they are prepared to offer a niche facility like this they don’t need to be ultra competitive on rate."
Who can they help?
So who could benefit from this sort of hybrid mortgage with unappealing rates?
David Hollingworth, from brokerage London and Country Mortgages, told us Low Start Mortgages could help first-time buyers who need some breathing space with lower monthly repayments during the early years or even existing interest-only borrowers that need an interim deal to ease them into a capital and interest repayment plan.
When you consider the numbers you can see his point.
According to Moneyfacts the market leading three-year fixed repayment deal on an 80% loan-to-value comes from Leeds Building Society with a rate of 3.14% and fees of £999. The monthly repayments on this deal would cost you £963.05 on a £200,000 mortgage taken out over 25 years.
However, with the comparable Clydesdale Low Start Mortgage on an 80% LTV and a rate of 4.49%, it would cost just £748.33 a month. That’s because borrowers are only required to pay off the interest on the loan and not any capital in the first three years.
So the Clydesdale deal - despite being 1.35% more expensive - offers a ‘saving’ of £214.72 a month or £7,729.92 over the whole three-year period.
That said you will be failing to chip away at the capital on your mortgage by £362.20 a month which equates to £13,039.20 over the deal period. But the next stage paying the SVR (currently 4.95% with Clydesdale) on a capital and interest repayment plan will ensure you don't suffer the consequences.
Clydesdale is only offering Low Start Mortgages through brokers on an advised basis so borrowers can be made aware that the monthly payments will increase significantly after three years.
Why is it needed?
Innovation like the Low Start Mortgage is desperately needed in the interest-only market. With an interest-only deal borrowers only have to pay off the interest each month on the proviso that the capital is somehow paid off at the end of the term.
Pre-credit crunch lenders were happy to give out interest-only mortgages and borrowers were able to get access to cheaper repayments.
But since the credit crunch hit, lenders are becoming more cautious and the whole market is being reviewed by the Financial Services Authority. The result is that the choices for interest-only borrowing are narrowing.The market is becoming closed off to new customers with smaller deposits, and to many existing borrowers who want or need to remortgage onto a new deal.
Last year a number of major providers tightened up their criteria for lending via interest-only, while many others like NatWest, the Cooperative and Nationwide chose to pull out of the market altogether.
The worry is that those already with an interest-only mortgage will become trapped, unable to move onto a new deal when rates rise. According to Moneyfacts there are only 23 lenders left willing to lend on an interest-only basis.
If you have an interest-only mortgage, keep up-to-date on your options with this article: Interest-only mortgages: the banks that will still lend.
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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
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