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25 Apr 2019

New interest-only mortgage offers equity release - but is it a good deal?

NatWest targets high-net-worth homeowners with flexible interest-only product

Borrowers with high earnings could take advantage of the market's only fully flexible interest-only mortgage, as NatWest launches its new 'HomeFlex' deal.

With this deal, homeowners can make fee-free withdrawals from a pre-agreed pot of cash (a 'flexi-pot') to spend however they wish, while also having the option to make fee-free overpayments to reduce their loan.

But how does HomeFlex actually work, and how do the rates match up to the rest of the market?

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How does NatWest's HomeFlex interest-only mortgage work?

HomeFlex is an interest-only mortgage, which means you only pay off the interest each month and not the loan itself.

As with other interest-only mortgages, you'll be expected to pay off the loan at the end of the mortgage term, so you'll need to have a plan in place for this - for example, selling the property and downsizing, or using money from investments or savings.

With interest-only mortgages, you'll usually pay more interest over the course of the mortgage than with a repayment mortgage. And if your home loses value during the term of the mortgage there's a higher risk of falling into negative equity.

Strict eligibility criteria

This mortgage is not available to everyone - in fact, there are strict eligibility criteria, including:

  • Minimum income: there must be a sole income of at least £75,000.
  • Available to NatWest Premium customers only: securing one of these accounts means you must be a UK citizen and have one of the following: sole income of £100,000/joint income of £120,000; £500,000 minimum mortgage borrowings with NatWest; or £100,000+ in savings or investments held with NatWest.
  • Maximum 75% LTV mortgage: this is including your flexi-pot and will depend on your ability to make repayments (see below for more).
  • Good credit history: no CCJs or bankruptcies are allowed.
  • Employment: the maximum lending age is 70, or up to your retirement age. You must not intend to retire before the end of the mortgage term.
  • Repayment strategy: you must have a way of paying off the mortgage once the interest-only period comes to an end.
  • Mortgage term: this must be between three and 35 years.

How much can you borrow?

The maximum amount you can borrow with the NatWest HomeFlex depends on your ability to make your monthly payments, as well as your repayment strategy.

Those who are planning to sell their property at the end of the mortgage term, using the money from the sale to pay off the remaining loan, can only borrow up to 50% LTV.

But, if you have alternative repayment plans, you can borrow up to 75% LTV.

You must borrow a minimum of £25,000, and have a flexi-pot of at least £10,000.

What mortgage deals are available?

You can choose between a two-year tracker mortgage and a two or five-year fixed-rate mortgage.

Those who want to know what their mortgage payments are going to be each month may like the certainty of a fixed-rate mortgage; tracker options follow the Bank of England base rate, so may go up or down depending on whether any changes occur during the term.

At 60% LTV:

MortgageInitial rateRevert rateAPRC
Two-year fixed1.73%4.24%3.8%
Five-year fixed2.09%4.24%3.5%
Two-year tracker2.29%4.24%4%

The cheapest deal on the market for a two-year fix suitable for remortgaging at 60% LTV is currently 1.44% - so you'll be paying roughly 0.3% more for HomeFlex's added flexibility. This difference is the same for five-year fixes.

There's a bigger gap between the the cheapest tracker, which is currently 1.49% - that's 0.8% less than the NatWest option.

At 70% LTV:

MortgageInitial rateRevert rateAPRC
Two-year fixed1.79%4.24%3.8%
Five-year fixed2.19%4.24%3.6%
Two-year tracker2.49%4.24%4%

Market-wide, the cheapest 70% LTV deal for a two-year fix is 1.50% and a five-year fix is 1.89%, which fits with the 0.3% difference. The cheapest two-year tracker, however, is 1.49% - a whole percentage cheaper than the HomeFlex deal.

At 75% LTV:

MortgageInitial rateRevert rateAPRC
Two-year fixed1.79%4.24%3.8%
Five-year fixed2.19%4.24%3.6%
Two-year tracker2.52%4.24%4%

If you're looking for the cheapest 75% LTV deal on the market, you could get a two-year fix at 1.44% and a five-year fix at 1.87%. The lowest-rate two-year tracker for this LTV is 1.49% - that's 1.03% cheaper than the NatWest deal.

You should also bear in mind that every variant of the HomeFlex mortgage carries a £995 product fee. You can either pay this up front or add it to the cost of the mortgage if the combined borrowing and flexi-pot amount allows for it, but the latter option will incur interest.

There will be early repayment charges (ERCs) if you fully repay your mortgage or switch to another provider within the initial two or five-year period.

What can the flexi-pot be used for?

The downside of the flexi-pot is that you have to wait three months before you can make your first withdrawal.

However, once you've got access to the cash, you can pretty much use it however you wish. NatWest provides examples such as giving your child a deposit for their first home, making home improvements, paying for a child's wedding, going on holiday or other 'life events'.

The one thing this money can't be used for is to pay off other loans or credit card debts you may have.

It's also worth bearing in mind that the minimum amount you can withdraw is £10,000.

How much will you actually pay?

To see how the mortgage works in practice, let's try a scenario where you've got a 75% LTV mortgage on a £600,000 property, including a £20,000 flexi-pot. This means you'd borrow £430,000, and add on the additional £20,000 to make it up to 75% LTV.

With the two-year fixed-rate mortgage at 1.79%, your monthly payments would be £642 and your remaining balance at the end of the two-year term would be £430,000. This is assuming that you don't make any overpayments and don't withdraw any of your flexi-pot.

However, if you withdraw, say, £10,000 from the flexi-pot, your new monthly payment would go up to £657 - you're charged £15 extra interest each month.

If you had made this withdrawal 12 months into the mortgage, at the end of the term your remaining balance would be £440,000 to reflect the extra £10,000 you've spent, and you'd have paid £180 more in interest.

If you were to make a lump sum overpayment of £10,000, the opposite would happen; you'd pay £627 a month, reduce the interest by £180 and have £420,000 remaining at the end of the mortgage.

You can also make monthly overpayments. Adding an additional £200 to your payment each month would bring up your bill to £842. If you did this halfway through the two-year term, you'd have a remaining balance of £427,581.

So, while the option to use money in your flexi-pot can be appealing, it's best-suited to those who can afford to make regular or lump-sum overpayments to mitigate the added interest and increased remaining balance that come as a result of spending it.

Can any other mortgage products compare?

Currently, no other products on the market offer quite the same thing as the NatWest HomeFlex mortgage, so it's certainly filling a gap.

The HomeFlex is different from other interest-only mortgages because you can make withdrawals from your flexi-pot and make fee-free overpayments.

Other products allowing overpayments won't let you withdraw cash from your home, and remortgaging to release equity means increasing your loan and monthly payments.

Before the economic crash, there were more products like this. The likes of Nationwide and Virgin Money have offered similar 'fully flexible' mortgage options in the past, but these don't appear to have been available for several years.

Instead, current 'flexible' mortgages just offer overpayments and may waive early repayment charges (ERCs).