Mortgages can be a maze of options and decisions. Among these, the interest-only mortgage stands out. In this guide, we’ll unpack its nuances, benefits, disadvantages, and the specific criteria .

This will help explain what lenders look for in a client and therefore it will help you answer the question ‘Can I get an Interest Only mortgage’?

1. What is an Interest-Only Mortgage?

An interest-only mortgage is where monthly payments only cover the loan’s interest for a set period. Consequently, the main loan amount remains constant. This model results in reduced monthly commitments compared to standard mortgages where you pay off both the loan and interest.

2. Mechanics of an Interest-Only Mortgage

If you borrow £100,000 with a 20-year interest-only term, the outstanding amount at term end remains £100,000. This differs from regular mortgages where payments gradually reduce the principal amount.

To secure such a mortgage, lenders usually ask for evidence of a ‘repayment vehicle’, which signifies how you plan to settle the capital at the term’s end. This could be:

• Sale of the mortgaged property. Typically, there’s an expectation of a minimum of £200,000 equity at the time of application. However, some lenders might not accept property equity as a repayment strategy.
  
• Other avenues like equity in Buy To Let properties, pension’s tax-free elements, or liquid investments, such as shares in public companies.

Most lenders set a cap on the Loan To Value (LTV) for interest-only mortgages, often between 50% and 75%. Yet, some may allow a higher LTV, with the additional percentage on a repayment basis. This structure is termed a ‘part-part’ mortgage.

For instance, on an 80% LTV mortgage, 75% could be interest-only, with the remaining 5% as repayment.

3. Pros and Cons

Advantages

• Lower Initial Payments – Only paying interest can significantly ease initial financial commitments.
  
• Investment Flexibility – Superior returns from other ventures might let you settle the loan faster without selling or remortgaging.
  
• Property Ownership – An interest-only mortgage is an opportunity to buy a property now and pay in full later if you’re expecting significant funds.

Drawbacks

• Cumulative Interest – As the principal stays intact, the cumulative interest might be higher.
  
• End-of-Term Pressure – If your repayment vehicle falters, it can induce financial strain.
  
• Qualifying – Such mortgages are not universally accessible. The prerequisites often include a sole income of £75,000 or a joint income exceeding £100,000.

4. Calculating Payments

Determining the monthly outlay is direct, being the interest on your loan. Using a £100,000 loan at 3.5% over 25 years as an example, the monthly interest-only payment equates to roughly £292. This is calculated as £100,000 * 3.5% / 12.

5. Key Pre-Application Steps

Before applying, consider using the help of a mortgage broker and via a site that shows broker ratings / validated reviews such via Unbiased or VouchedFor.

• Researching Mortgage Types – Comprehend the varied mortgages to determine the best fit.
  
• Affordability Assessments – Lenders evaluate whether you can consistently meet monthly commitments, factoring in both earnings and outlays.
  
• Credit Rating – A robust credit score can significantly bolster application approval chances.
  
• Repayment Strategy – Lenders often seek a concrete plan for settling the mortgage once the interest-only phase concludes.
  

6. Ongoing Management

Post-acquisition, regularly appraise your repayment vehicle. Ensure it’s primed to accumulate the requisite lump sum by term end. If investments are your chosen route, be proactive in risk assessment.

7. Affordability Tests

After the 2008 financial upheaval, lenders intensified their scrutiny. This meticulousness ensures borrowers can manage their commitments, making such mortgages suited to those with a robust financial foundation and transparent repayment blueprints.

8. Buy-to-Let and Interest-Only Mortgages

For buy-to-let properties, interest-only mortgages are favoured as they keep the committed costs down. This is important as if intent is to settle the loan using the profits from a future property sale.

9. Mortgage Type Switching

Transitioning between interest-only and regular mortgages is possible, and some lenders might offer a combination of the two.

10. Wrapping Up

Interest-only mortgages, with their appealing lower initial payments, come with inherent risks. Fully grasping their structure is vital. For a bespoke assessment, consult a mortgage broker. A blog with more information on mortgage types and repayment methods can be found here.

---

---