INTEREST ONLY MORTGAGES
Working with our clients to provide the right repayment strategy from BTL investors to HNWI.
A repayment strategy that may be an ideal solution if you're:
- A frequent house-mover
- Buying a second home as a short-term investment
Or you're simply looking for:
- Lower monthly payments
- An affordable way to purchase a higher-priced home
What is an interest-only mortgage?
- Only the interest charges are paid each month on the amount you borrowed.
- You payback the original amount you borrowed from the lender at the end of the interest-only mortgage term
Interest-only mortgage Vs a Repayment mortgage
Interest-only mortgages
- Your monthly repayments will be less than if you were on a repayment mortgage.
- You will still need to pay the full balance of the entire loan amount at the end of the ‘term’- the agreed period of time.
Repayment mortgages
A repayment mortgage is also known as a capital repayment mortgage, which is the most common form of repayment plan.
Taking out a capital repayment mortgage means:
Your monthly repayments will consist of both:
(i) A small amount of the actual loan.
– and-
(ii) An amount of interest.
The original loan amount owed will reduce every month – as long as you keep up the repayments. The interest rate on a repayment mortgage can either be a fixed rate or variable rate. A variable rate means the interest rate can go up or down.
Am I eligible for an interest-only mortgage?
Different mortgage lenders may offer their own type of interest-only mortgages.
Your eligibility will take into account your personal circumstances, together with a lender’s assessment, based upon:
Your ability to meet the monthly payments
Type of property you intend to purchase
Lenders can often be reluctant to offer an interest-only mortgage, of any type, if it’s for the purchase of a non-standard construction property.
Their concern is usually based upon type of construction materials used and /or a non-standard design, leading to:
- Higher than normal maintenance and repair costs.
- Likelihood of a shorter lifespan.
- Potentially greater risk to fire, damp or structural problems.
- Concern over ability to resell when a home may be repossessed for monthly payment defaults.
Age LIMIT
Mortgage lenders usually set a minimum and maximum age for borrowing.
A number of interest-only mortgage providers may have no maximum age limit. Others also offer specific, age-related mortgage products, such as retirement interest-only (RIO).
Landlord Experience for investment properties
Investment properties are often purchased by landlords who will also seek buy-to-let mortgages.
If you are a landlord typically seeking an interest-only mortgage for the purchase of a HMO (house of multiple occupancy), you will need to show the lender proof of previous landlord experience.
First-time landlords may be considered by an interest-only mortgage lender who is likely to be a specialist mortgage provider.
YOUR Credit history
Acceptable Repayment plan
- Your ability to keep up repayments for the entire mortgage term is the single most important factor.
Fortunately, there are a number of options for how repayments on your mortgage can be made. Advice should always be sought from an independent financial advisor or specialist broker, regulated by the Financial Conduct Authority (FCA).
Financial advisors, mortgage brokers and lenders may recommend interest-only deals to borrowers with a secure repayment plan for the original loan amount and significant equity.
It's important you need to know...
Deposit for interest-only mortgages
The deposit amount for an interest-only mortgage can be greater than for a repayment mortgage. This is because the ‘loan to value’ (LTV) of an amount offered on interest-only mortgages is usually lower than for capital repayment mortgages.
Each lender will make their own evaluation which can vary from one another. A typical deposit can be:
25 per cent – buy-to-let properties.
Up to 50 per cent – residential properties.
The two key ways of applying for an interest-only mortgage are either:
Directly with a mortgage lender.
-or-
Through a mortgage broker.
Often, the best interest-only mortgage offers are only available through brokers.
Property buyers often have the best chance of securing the most affordable interest-only mortgage if they apply through an established mortgage broker.
It’s always recommended to seek advice from a mortgage broker, who will act as your independent advisor.
Intended use of mortgage can affect the amount you can borrow
The amount you borrow on an interest-only mortgage loan will also depend on the purpose of the mortgage.
Buy-to-let/ investment properties – the amount of monthly / yearly rental income the property is expected to yield.
Residential properties – usually based on an affordability calculation, unique to each lender. It should be noted that a lender is likely to offer a loan-to-value (LTV) which is lower compared to a residential repayment mortgage based upon the same income level.
Types of acceptable repayment plans
Selling the MORTGAGED property
investment options
personal savings or lump sum
Remortgaging
The decision to remortgage will take into account key factors such as your age and the maximum lending term agreed. You may decide to do this as you reach the end of your mortgage term. Alternatively, and depending on your present position, your mortgage could be extended by a current provider.
Overpaying your mortgage
Mortgage overpayments are a commonly-used strategy. Rather than pay just the interest on the loan each month. Subject to your agreement terms, up to 10 per cent each year may be allowed by your lender to exceed the agreed repayments on your mortgage, and the outstanding amount of the original loan. However, a penalty may be imposed for an early repayment outside of the lenders terms.
What are Early repayment charges (ERC)?
Your lender may impose a penalty, known as an early repayment charge (ERC) if you:
- Overpay by more than the amount agreed between you and the lender.
- Pay off the entire loan earlier than the agreed mortgage term.
The amount of the ERC imposed is normally a percentage of the outstanding mortgage. This can be typically between 1 – 5 per cent but is always disclosed on your mortgage illustration.
I can’t repay my interest-only mortgage loan – what happens next?
It’s important to understand what will happen if you can’t repay an interest-only mortgage. Under the agreed terms and conditions, the provider has a legal right to take repossession of your home if the loan has not been repaid by the end of the mortgage term.
If you’re considering an interest-only loan you need to know there could also be financial risks involved, such as:
- Interest rates rising – If your Interest-only mortgage has a variable interest rate, this means that any increase in interest rates will see the amount of interest you pay on your mortgage also rise.
- Temporary low repayments – If you have a fixed rate mortgage, once the period of low monthly repayments on your interest-only loan are complete you may see a noticeable increase in your payments on the original loan amount.
- Equity loss – The value of the property you are buying may not increase in value and your loan to value remains static or in a worst case scenario the value decreases.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON OUR MORTGAGE.
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