Interest-only mortgages

When you apply for a mortgage you need to choose how you’re going to repay it. You can opt for either a capital repayment (capital & interest) or an interest-only mortgage.

With an Interest-only mortgage, you only pay the interest due on the mortgage loan. With a capital repayment, you pay interest and reduce what you owe at the same time.

Monthly payments for interest only are much lower; as the name suggests, you’re only paying off the interest. But you will still need to pay off the loan in its entirety at the end of the term. Conversely, when you reach the end of a capital repayment mortgage, you have nothing more to pay. The house is yours.

Getting an interest-only mortgage

Interest-only mortgages attract borrowers for two reasons:

1. The monthly repayments are much lower
2. They bring the flexibility of using various repayment vehicles to pay off the capital

These types of mortgages are more common in the buy-to-let market. But lenders are becoming more amenable to residential interest-only applicants.

Homeowners can look to pay off just the interest on a loan for their primary residential property. But it is a lot more difficult to secure an interest-only deal for the home you’re going to be living in.

On one hand, more lenders are reintroducing interest-only mortgages to their range. On the other, borrowers have to meet strict criteria for a lender to consider them.

That’s because the FCA has tightened rules governing interest-only mortgages. As a consequence, lenders have stricter rules governing whom they’ll accept.

Borrower requirements and repayment vehicles

Most lenders offering interest-only mortgages expect you to have:

• A large deposit ready to put down, at least 25%
• An approved repayment vehicle in place to repay the mortgage loan at the end of the term

Approved repayment vehicles for residential interest-only mortgages include:

• A savings plan
• An investment portfolio
• A pension scheme
• Other assets you plan to sell

All the above must cover the value of the mortgage you take out.

Conditions that will make interest-only lenders amenable

Providers are more likely to approve interest-only mortgages if you meet the following conditions:

• You keep borrowing to 50% loan-to-value
• You will need to put up a 50% deposit or hold 50% equity
• If the repayment vehicle is the sale of the property
  • You need to have a minimum of £200,000 equity in your home
• Have a minimum annual income of £50,000
  • This gives the provider greater confidence in your affording to settle the loan at the end of the term
• You receive sizeable annual bonuses
  • These must boost your total annual income, allowing you to pay off capital in lump sums each year
• You’re an older client who wants to live in a property for a defined period of time
  • You will then use the ‘sale of the property’ to pay off the loan when you downsize

Get expert advice

Unlike many brokers, we’ve taken time to build strong relationships with a host of lenders. We are 100% independent, so have no restrictions on which lenders we can approach.

Leveraging our established contacts, we can make strong cases for interest-only applicants.

Our experienced advisors have helped many homebuyers secure interest-only mortgages. If your circumstances meet our lenders’ requirements, we can do the same for you. To find out how, call us on 0208 421 7998 or enquire now.