Can I get an interest only mortgage?
If you had asked this question a couple of years ago the answer would probably have been that it would be a struggle. After the financial crisis the lenders effectively shut their doors and stopped lending, especially products that offered low interest, no fees, a high loan to value and interest only. Now it seems that they are becoming available again from more and more lenders.
What is an interest only mortgage?
An interest only mortgage is an arrangement whereby you borrow the amount you need to buy the property and then rather than making large capital repayments and interest each month you just pay interest making the payments more manageable. You never make a dent in the capital, you just pay the interest for the life of the mortgage. When you get to the end of the term you still owe the capital so you will need to have a plan in place to repay this.
An example of the difference in repayment and interest loans would be if you were to borrow £150,000 over 25 years at 5% interest. The interest only payments would be £625 per month and the repayment and interest would be £877. A difference of £252 per month but it does mean the loan would be repaid at the end of the term if interest and capital payments were made.
How does it work in the long term?
There is a risk. For a long time people relied on an increase in property values to repay the capital at the end. If we were to see another financial crisis and the borrower had overstretched themselves then you may have to make other arrangements. Many used to take out endowment policies to run alongside the mortgage. They matured when the mortgage term ended and paid off the capital. These became less popular when they failed to achieve the amount needed to clear the debt.
Now lenders are agreeing to 75% loan to value deals as long as the capital from the sale of the property will be used to pay the outstanding loan at the end of the term.
Will this work for me?
Everyone is different and your circumstances may change. If you think you will struggle to be able to repay as well as interest then you could take an interest only for the short term and with many lenders you can switch to paying back the capital later on. Some lenders will offer you the means to pay some of the capital back so although you may not completely clear the mortgage you will have cleared some capital by the end of the term.
What are the criteria?
You can get interest only mortgages but under tough new regulations brought in by the FCA’s Mortgage Market Review these loans can only be provided if there is a clear strategy for repaying the capital at the end of the term.
The process for taking out a mortgage is much tougher than it used to be and you will face questions about your spending, income and affordability. With this now added to the process of applying for a mortgage you will benefit from the advice of a professional more than ever. Add this to the huge range of products available and you could really save yourself money, time and stress by talking to us.
New regulatory requirements brought in under the Financial Conduct Authority's Mortgage Market Review stipulate that lenders can provide interest-only mortgages only if there is a credible strategy for repaying the capital.
Borrowers will now face tough questions on their income and spending to assess their affordability and if they can cope in the event of interest rates rising.