The Clydesdale Bank has bucked the trend in the residential mortgage market by introducing an interest-only mortgage option at a time when other lenders are pulling similar products from the market.
The new deal is being unveiled on Monday January 21st and offers borrowers the opportunity to fix their mortgage for three years on an interest-only basis.
Last year, the Co-operative Bank signaled its intention to stop offering interest-only mortgages to new customers and they were followed by other major lenders such as Nationwide, the Royal Bank of Scotland and NatWest.
So, why is the Clydesdale Bank going against the grain?
It looks like the option is being put out there as a niche product to tempt certain types of borrows who can expect to see their earnings rise in the future and want to be able to pay less now for their mortgage on an interest-only basis and then convert it into a repayment mortgage when their earnings rise.
The deal would suit a young professional just starting out in their career or someone who is self-employed and can make large irregular repayments every few years.
The product is called the “low start mortgage” and it gives borrowers three years to only repay interest. After this period the product reverts to a repayment mortgage product where both the capital and interest are repaid at the bank’s standard variable rate of 4.95 per cent for the remaining term of the mortgage.
This is a high rate but lower rates are available the bigger the deposit you have and there are much better deals out there but then perhaps the Clydesdale does not have to be too competitive on rates because there are very few similar products on the market.
Borrowers who apply for the product will be assessed on their ability to repay the borrowing on a capital and interest basis and will need a deposit of at least 20 per cent to be approved.
For borrowers with a 40 per cent deposit the rate goes down to 3.09 per cent and rates go up to 4.49 per cent for 80 per cent loan-to-value (LTV) borrowers. The mortgage fee is £999.
Ray Boulger from mortgage brokers John Charcol believes the product fills a gap in the market and he is pleased to see new options for borrowers coming to the market.
He said: "It's good to see a lender coming back into the market with an interest-only proposition which in an enhancement from what is available now," he said.
"It gives people an opportunity to keep their payments low for a period – perhaps a young professional who expects a pay increase over a three-year period, or someone with a commitment like school fees for a limited time.
"Clydesdale is offering something unique to the market, which means it doesn't have to be very competitive on rates.”
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