Interest Only Mortgages Specialists

Q: What are the advantages of an interest only mortgage?

Lower monthly payments: As your monthly payments will simply be repaying the interest cost on your mortgage, rather than also repaying the mortgage debt each month, your overall monthly payment is lower as a result Ability to save or invest your disposable income: As your monthly payments are lower, this will increase your disposable income each month (compared to taking a repayment mortgage). This gives you the opportunity to save or invest this money each month, or put towards important costs such as school fees or other financial goals.

Interest only mortgages are a type of mortgage where you simply pay the interest cost every month, rather than also repaying the mortgage debt.

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Buy A Home Remortgage

Advice Is Vital For Interest Only Mortgages

Interest only mortgages are a type of mortgage where you simply pay the interest cost every month,

With an interest only mortgage, you will need a ‘repayment vehicle’ to repay the mortgage debt at the end of the mortgage term. Some common repayment vehicles include savings or investments, a lump sum from your pension when you reach retirement, or downsizing into a smaller property.

With an interest only mortgage, lenders will scrutinise your repayment vehicle as part of your application to ensure that you have adequate plans in place to repay this interest only debt at the end of the mortgage term. Many lenders will only consider lending on an interest only basis where you have a single (or joint) income of £75,000 – £100,000, and they will also require you to have a minimum £200,000 – 250,000 deposit or equity within your property.

However, there is no ‘one size fits all’ approach to interest only lending between mortgage lenders. These minimum income and equity requirements can be (much) lower depending on your circumstances and the repayment vehicle(s) you have available to repay the mortgage debt.

It is vital to receive advice and guidance when considering an interest only mortgage, to not only understand the risks involved but ensure the mortgage is structured correctly based on your individual circumstances.

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Case Studies

The Story

A homeowner approached Lansdown Financial looking to arrange a £350,000 interest-only remortgage on their property, valued at £550,000.

The client wanted to keep their monthly mortgage payments as low as possible while retaining the flexibility to manage their finances and make provision for repaying the mortgage at the end of the term.

With an existing mortgage coming up for renewal, they needed a lender who could offer competitive interest-only mortgage terms without unnecessarily restricting their options.

The Challenge

Securing an interest-only remortgage can be more challenging than arranging a traditional repayment mortgage, as lenders typically apply stricter eligibility criteria, including minimum income requirements, loan-to-value restrictions and acceptable repayment strategies.

With the client requiring £350,000 against a property valued at £550,000, representing approximately 64% loan-to-value, we needed to identify a lender who could accommodate the interest-only requirement while offering competitive terms.

Our challenge was to find a suitable lender whose criteria aligned with the client’s financial circumstances and proposed repayment strategy.

The Solution

Lansdown Financial reviewed the client’s financial position, mortgage requirements and intended repayment strategy before approaching lenders offering interest-only remortgage products.

Using our knowledge of interest only lending criteria and relationships with mortgage providers, we identified a lender whose interest-only requirements were suited to the client’s circumstances.

We successfully arranged the £350,000 interest-only remortgage against their £550,000 property, securing competitive terms and allowing the client to benefit from lower monthly contractual payments compared with an equivalent capital repayment mortgage, while maintaining their preferred repayment strategy to ensure the mortgage debt would be cleared in full before retirement.

FAQ

Understanding Interest-Only Mortgages

Interest-only mortgages work differently from standard repayment mortgages and aren’t suitable for everyone. We’ll explain how interest-only mortgages work, who may be eligible, the lending criteria you may need to meet and the repayment strategies lenders may accept.

What are the advantages of an interest only mortgage?

Lower monthly payments: As your monthly payments will simply be repaying the interest cost on your mortgage, rather than also repaying the mortgage debt each month, your overall monthly payment is lower as a result

Ability to save or invest your disposable income: As your monthly payments are lower, this will increase your disposable income each month (compared to taking a repayment mortgage). This gives you the opportunity to save or invest this money each month, or put towards important costs such as school fees or other financial goals.

What are the disadvantages of an interest only mortgage?

Not all mortgage lenders may offer interest only mortgages: Due to each lender having strict eligibility criteria for an interest only mortgage, you may not have as many products or lenders available to you compared to taking the mortgage on a repayment basis, especially if you are a first time buyer.

Your mortgage balance will not reduce: As your monthly payment is simply covering the interest cost each month, your mortgage balance does not reduce unless you make overpayments into your mortgage. At the end of the mortgage term you will still owe the bank the original amount you borrowed (minus any overpayments you have made). You need to ensure you a clear and adequate repayment vehicle to ensure the mortgage debt is cleared in full at the end of the mortgage term.

Higher overall costs: As the mortgage debt is not reducing each month, you will pay more interest overall during the mortgage term. This is because you’re paying interest on the full amount you originally borrowed every month.

Do I need a 'repayment vehicle' to qualify for an interest only mortgage?

Yes, this is very important. Lenders will need to verify your repayment vehicle as part of your application to ensure they are comfortable that you will adequate funds available to repay the interest only mortgage debt in full at the end of your mortgage term.

Repayment vehicles that lenders typically accept are a lump sum from your pension, cash savings or investments, the sale of another property you may own, or the sale of your main residence and downsizing before you reach retirement (or a combination of these). Banks will request proof of your repayment strategy as part of your application and they will require this before they able to issue your mortgage offer.

Are the products available the same as a repayment mortgage?

This does vary across the market. Some banks do have specific interest only mortgage products, whilst other lenders offer the same products regardless of whether you apply for an interest only or capital and repayment mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.