First-time buyers with only a 5 per cent deposit now have access to a new type of mortgage that combines repayment with interest-only borrowing.
The product, introduced by lender Gen H, is designed specifically for buyers who have smaller deposits but still want to get on the property ladder.
Interest-only mortgages were once common in the years before the 2008 financial crisis but have become far less available in recent times. Typically, these products are limited to borrowers with large salaries and deposits of 20 per cent or more.
Gen H’s version allows borrowers to place up to 80 per cent of their mortgage on an interest-only basis, with the remainder taken out as a standard repayment loan. This gives buyers more flexibility over how they manage their monthly payments.
The lender has also confirmed that borrowers will have the option to make overpayments, subject to certain limits, so they can gradually reduce their overall balance if they choose.
With an interest-only mortgage, monthly payments are kept lower as the borrower only pays back the interest each month. However, the original amount borrowed remains outstanding and must be repaid in full at the end of the term. This is usually done through savings, investments, or by selling the property.
This differs from a traditional repayment mortgage, where each monthly instalment covers both the interest and a portion of the original loan, steadily reducing the outstanding balance over time until the mortgage is cleared.
The benefit of Gen H’s model is that it keeps monthly outgoings lower for borrowers, while still providing a route to homeownership. However, buyers must keep in mind that the full capital sum still needs to be repaid eventually.
Eligibility criteria mean that applicants must have a minimum household income of £50,000. The lender expects the product will be particularly attractive to those who can currently afford high rents but lack family support to save for a larger deposit.
For example, a couple with a combined income of £70,000 looking to buy a £400,000 property with a £20,000 deposit may struggle to secure a standard mortgage due to high affordability tests. With Gen H, if half of their loan is placed on an interest-only basis, monthly payments could be brought down from over £2,100 to around £1,939 – making the purchase more manageable.
Pete Dockar, chief commercial officer at Gen H, said the product has been designed to better reflect the realities of today’s housing market. With the average property costing around eight times the average salary, he said, mortgages must be tailored to individual buyers. He added that part and part mortgages provide 100 per cent homeownership from the outset, without the complications of shared ownership or the need for family contributions.
Mortgage experts have welcomed the flexibility of the product but caution that the interest-only portion of the loan does not disappear. Nicholas Mendes of broker John Charcol noted that while such mortgages help reduce monthly outgoings, borrowers must have a credible plan to repay the balance at the end of the term, whether through overpayments, rising income, or property equity.
Rates for Gen H’s new mortgage depend on the borrower’s deposit size. For buyers with a 5 per cent deposit, a five-year fixed rate is currently 5.91 per cent, while the two-year option stands at 5.99 per cent, both with a £1,499 fee. These are higher than the cheapest repayment-only deals on the market, with some five-year fixes available from around 4.77 per cent.
Interest-only mortgages were once highly popular. In 2007, about half of first-time buyers used them, often linked to investment plans designed to repay the loan at the end of the term. But when many of these investments underperformed, large numbers of borrowers were left unable to pay off their debts, leading to tighter regulations after the financial crisis.
Nowadays, interest-only mortgages are most common among buy-to-let landlords, who prefer them because they free up cash for further investment, or among high earners who can repay in irregular but large lump sums.
Gen H’s move reintroduces the concept for first-time buyers, but on stricter terms and with clear requirements around income and affordability. Mortgage advisers stress that while the product is not inherently risky, buyers must fully understand the long-term implications. Without a repayment plan in place, the debt will remain a significant financial burden.
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