Yorkshire Bank Interest Only Mortgage

What is an interest only mortgage?

Interest only mortgages are mortgages that require you to repay the entire capital at the end of the mortgage term. The monthly payments with an interest only mortgage are relatively low, as they are made up of just the interest of the mortgage.

When to use an interest only mortgage?

If you feel that you are having trouble servicing your current mortgage payments, then you could use an interest only mortgage to reduce the size of your monthly mortgage bill.

Not only could an interest only mortgage be used to reduce your monthly outgoings, but it could be used to remortgage your property. This could be useful if you need to release equity in your property.

Alternatively, you could use an interest only mortgage to remortgage and get a better rate on your mortgage by avoiding your lender’s standard variable rate.

Risk of negative equity

Negative equity occurs when the remaining amount on your mortgage is more than the value of your home.

If you take out an interest only mortgage, then there is a greater chance of falling into negative equity.

The amount of interest

With an interest only mortgage, you will pay less every month than a normal mortgage. However, the majority of interest only mortgages have higher interest rates than regular mortgages. Therefore, you will pay more in interest over the entire mortgage term than you would with a regular mortgage.

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Interest only mortgages with high street lenders

The interest only mortgage lenders you find on the high street will not have set criteria, but most of them will consider the following:

Affordability: Throughout the application process, traditional lenders will focus on affordability to ensure you can service monthly payments. In order to qualify for an interest only mortgage, you will need an individual annual income of £50,000 or a joint income of £75,000.

Repayment: Traditional lenders are reluctant to provide an interest only mortgage to anyone without a repayment vehicle strategy in place. A repayment vehicle strategy is the plan you intend to execute to repay the mortgage at the end of the mortgage.

Loan to value (LTV): Typically, traditional lenders will only provide mortgages up to 75% of the property’s value. This means you will need to put down a deposit of at least 25% to secure an interest only mortgage. It is possible to secure higher LTV interest only mortgages, and thus put down a smaller deposit, through a professional broker.