This week has seen the launch of another low-deposit mortgage, this time from Newcastle Building Society. Its First Step mortgage offers first-time buyers to borrow up to £350,000 with a deposit as little as £5,000, but there is a catch. Newcastle Building Society will only offer its low deposit mortgage to borrowers who have saved their own deposit fund, as it excludes any funds either gifted or loaned by parents, family or friends.
According to several mortgage brokers, over half of first-time house purchases are supported by what is commonly referred to as the bank of mum and dad (BOMAD). In this article, we explain how Newcastle Building Society's First Step mortgage works, who can qualify and how it compares with similar mortgage products.
About Newcastle Building Society’s First Step mortgage
The First Step mortgage offers first-time buyers an ultra-low deposit mortgage that can be arranged to purchase a property with a deposit of only £5,000. Newcastle Building Society has launched the mortgage to support those aspiring homebuyers who may have smaller deposits and by excluding those with financial support from parents or other parties, it has prioritised borrowers who have used their own financial resources to save a deposit towards their house purchase.
Head of commercial and product development, Ben Smith commented that “First-time buyers continue to face real challenges to getting that first foot on the property ladder - with rising house prices, higher rental costs and the cost of living making it harder than ever for people to save for a deposit. At Newcastle Building Society, we’re committed to doing everything we can to ensure that aspiring homeowners aren’t locked out of the market simply because they can’t build the kind of deposit that many traditional mortgage products demand.”
How does the First Step mortgage work?
The First Step mortgage is available to first-time buyers only (at least one of the applicants must be a first-time buyer), looking to arrange a mortgage at a loan-to-value (LTV) ratio of between 95% and 98%, however, the minimum deposit is £5,000. The mortgage can only be arranged on a repayment basis for between 5 and 35 years to fund the purchase of a residential property that is not a new build. Mortgage applicants must show that the funds for the deposit have come from their own resources as the mortgage conditions do not accept funds either loaned or gifted by a third party.
Most low-deposit mortgage options come with higher interest rates and Newcastle BS's new offering is similar with an initial interest rate of 5.25%, which is fixed for 5 years. You can compare this to other mortgage deals in the market by using our mortgage rate comparison tool which searches over 90 lenders' mortgage deals.
Newcastle BS First Step mortgage key features
| Mortgage feature | Details |
| Minimum deposit | £5,000 or 2% of the purchase price whichever is higher |
| Minimum mortgage loan | £96,000 |
| Maximum mortgage loan | £350,000 |
| Loan-to-value range | 95.01% up to 98.00% |
| Initial fixed interest rate | 5.25% |
| Standard variable rate once deal ends | 6.50% |
| Interest rate fixed period | 5 Years |
| Property type | Residential property (no new build) |
| Mortgage type | Repayment (capital and interest) |
| Mortgage term | 5 years to 35 years |
| Overpayment allowance | 10% of mortgage balance per annum |
| Early repayment charges | Year 1 - 5% of outstanding balance
Year 2 - 4% of outstanding balance Year 3 - 3% of outstanding balance Year 4 - 2% of outstanding balance Year 5 - 1% of outstanding balance Where the year ends on the 31st of January in each year |
How to qualify for the First Step mortgage
If you wish to secure the First Step mortgage you will need to be first-time buyers (at least one applicant) and show that the deposit money has come from your own funds. You can apply for the mortgage either directly with Newcastle Building Society or through a mortgage broker to Newcastle for Intermediaries. This mortgage product is currently exclusively available with L&C Mortgages, Connells Group and Mortgage Advice Bureau brokers.
The First Step mortgage is not available in certain circumstances and these are detailed below:
- Third party gift or loan is to be used to fund the deposit
- For purchase of a new-build property
- For purchase of a property outside England, Wales or Scotland
- The applicant is not British or an EEA national with settled status or indefinite leave to remain where appropriate
- The purchase is under a Joint mortgage sole proprietor or Shared ownership scheme
Pros and cons of low deposit mortgages
Although securing a mortgage with a small deposit can provide a great opportunity to own your home sooner than may otherwise be possible, there are some factors that you should consider before you do. One of these is ‘negative equity’ - a situation where your property’s value falls below the level of mortgage loan taken out to buy it. Negative equity can make it difficult for borrowers to remortgage at the end of their fixed term. If you find yourself unable to remortgage, the interest rate on the First Step mortgage will change to the standard variable rate of 6.50% after the 5 year fixed term expires.
Here are some examples of the pros and cons of choosing this low deposit / high LTV mortgage:
Pros
- You can save a deposit sooner
- You can port the mortgage if you decide to move home
- There is no product fee to pay
- Free standard valuation
Cons
- Risk of negative equity
- Relatively high interest rate
- 5 Year fixed term could mean that you are paying a high rate of interest if rates fall within that period
Alternatives to Newcastle BS’s First Step mortgage
Over the last few years, the number of low-deposit mortgages has grown. These include the Skipton Track Record Mortgage, April Mortgages No-deposit mortgage as well as Yorkshire Building Society’s £5k Mortgage, which is very similar to Newcastle BS’s First Step mortgage. Below we compare a few of these options with the Newcastle First Step mortgage.
Low-deposit mortgages compared
| Lender - Product name | Interest rate | Max LTV | Fixed rate period | Standard variable rate | Lender fee |
| Newcastle BS - First Step | 5.25% | 98% | 5 Years | 6.50% | £0 |
| Skipton BS - Track Record | 5.39% | 100% | 5 Years | 6.54% | £0 |
| April Mortgage - No Deposit | 6.29% | 100% | 10 Years | 7.50% | £1,190 |
| Yorkshire Building Society - £5K mortgage | 5.46% | 99% | 5 Years | 6.70% | £0 |
The qualifying criteria across these alternative mortgage options will vary as each comes with its own terms, conditions and limitations. To determine which is the best option to suit your circumstances and meet both your short-term and long-term needs, you will need to consider them carefully.
How to find and arrange the best mortgage for your needs
Getting your first foot on the property ladder is a mammoth task for most, as house prices continue to rise, meaning the goal posts for the size of deposit you need keep moving. A mortgage deal that makes it easier to secure the home you need with the savings you have will be good news for many but it does have to be weighed up against factors such as the relatively high interest rate and long fixed rate period attached to it. Simply acting on the fact that 'if you can, then you should' could mean that you end up paying more interest over the initial period of the mortgage. Comparing mortgage deals to keep your monthly payments low and being able to remortgage to a better deal if rates fall should also factor into your decision-making. If you are getting started then you will find helpful information in our article, "First-time buyer guide". You will also find a summary of regularly updated mortgage deals for first-time buyers in our article, "Best mortgage deals for first-time buyers UK".
Arriving at the best way forward is often difficult without some expert guidance and most people buying their first home will find that the advice, guidance and support provided by a mortgage broker is invaluable. Mortgage brokers not only have an in-depth knowledge of the mortgage market, but they also have access to mortgage products that lenders make available through intermediaries only - these are not available directly to mortgage customers. They will use their expertise to source the best mortgage solutions based on your financial needs and circumstances while making sense of the often confusing technical jargon.
If you do not have a mortgage broker then you can find one in your local area using the online directory for financial professionals, VouchedFor*. It lists mortgage advisers and other financial professionals based on their expertise, allowing you to select the one you would like to contact based on customer reviews. Alternatively, you can choose the free mortgage broking service provided online and over the phone by Habito* free of charge. Habito is one of the first of its kind, offering mortgage advice, guidance, and support without the need for physical meetings. This makes it easier for customers to liaise with and seek support from their mortgage broker and the administration team, which guides them from initial enquiry to mortgage completion.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Habito, Vouchedfor
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