Interest Only Mortgages
What Is An Interest Only Mortgage?
An interest only mortgage is where you only repay the lender interest (not capital) on the mortgage or loan for the period of the borrowing.
A client borrowed £250,000 on a house valued at £500,000. The client opted for a 5 year fixed rate interest only mortgage on an interest only basis where the annual rate of interest was 1.65%. The mortgage was over a 25 year term. The client's interest payments were fixed at £345 per month. At the end of the term of the mortgage the client would need to repay the full loan of £250,000 back to the lender.
So an interest only mortgage means that your monthly repayments will be a lot lower however no capital is paid off during the mortgage term.
Who Offers Interest Only Mortgages?
Not all lenders offer interest only mortgages and those that do have set criteria to determine whether they are happy to lend on this basis.
Lenders are keen understandably to ensure at the end of the mortgage term the loan will be repaid.
Criteria for lenders will vary but all will want to understand how you intend to pay off the mortgage at the end of the term. A repayment vehicle strategy will be required.
Some lenders will accept sale of property as a way of paying off the debt. Some will want to see a saving plan such as regular investment into ISAs or investment vehicles.
Lenders will want to see statements of your investments as evidence that a repayment vehicle is in place.
Most lenders will only offer an interest only mortgage if the loan to value (LTV) is lower than a set percentage of the value of the property you are mortgaging.
This is typically 75% LTV or less. Some lenders will require a part and part strategy for any borrowing over a set limit e.g. 60%.
So if you have 25% equity in your property, a lender may require that 15% of borrowing is on a part and part basis with 60% fully on an interest only basis.
What is a Part & Part Mortgage
With some lenders it is possible to split your mortgage repayments on an interest only mortgage and a capital repayment mortgage basis.
This will reduce your mortgage balance over time, but at the end of the term there will still be an outstanding capital sum to repay.
Using Sale of House as a Repayment Strategy
Lenders take different approaches to the sale of houses as an exit strategy for paying off a mortgage. For many people downsizing to a smaller home later in life is a logical step and often it will be to a part of the country where house prices are lower.
Some lenders will want to know where you intend to downsize to so they can assess the valuation of properties and ensure your plan is plausible.
A key consideration for lenders is affordability when they lend. In assessing whether an interest only mortgage is right for you income criteria will come into play.
Typically lenders will want to see an individual with an income of at least £50,000 or a household income of £75,000 to lend on an interest only basis. This criteria will vary so speaking to a broker such as ourselves will help you get the right deal for your circumstances.
Features of what we offer include:
Whole of market service - we work with most UK lenders that operate on an interest only basis
Access to leading market mortgage rates
Access to exclusive loan deals not available on high street
Fast turnaround - speak to us today if you need to move quickly
We have lenders who will take into account previous defaults and missed payments
Looking to raise additional finance on top of your existing mortgage or buy to let mortgage? - we have access to a range of finance solutions
To investigate your mortgage options call our team on 0117 403 4474 or fill in our call back form.
As the name suggests, an interest-only mortgage works on the basis that you only pay the interest due on the amount you borrowed each month.
Potential advantages of interest only mortgages
There are several reasons why you might consider an interest only mortgage, some of which include:
Lower repayments - The prospect of lower monthly payments can be an appealing option and could make a mortgage more affordable in the short term. Use a mortgage calculator to work out your monthly payments.
Potential extra cash - If your repayment vehicle does really well over the term of the mortgage, you could find that you can afford to pay off the capital with some extra cash left over.
Flexibility - Interest only mortgages can sometimes offer greater flexibility than repayment mortgages – for example, you may be able to make overpayments one month and just pay interest the next month depending on your cash flow.
Potential disadvantages of interest only mortgages
While the monthly repayments you make on an interest-only mortgage are likely to be lower than with a repayment mortgage, there are some potential disadvantages to be aware of:
Lack of security - This is one of the main potential drawbacks of an interest only mortgage. There is no guarantee that your repayment vehicle will perform well enough to ensure that you can pay off the mortgage in full at the end of the term.
Limited Lenders – Not all UK lenders offer interest only options. Lenders that do will do so on set criteria, and there are only a small number of lenders that accept selling the property as a valid reason for repayment.
Existing mortgage on property - Typically interest only lenders will require you to have no more than a 75% LTV on your property.
New Mortgage? If yes you will typically need a large deposit – You might save on your monthly repayments with an interest only mortgage, but you may find it hard to access one unless you can provide a substantial initial deposit. Most lenders who provide an interest only option will require you to have at least a 25% deposit.