Interest Only Mortgage

With an interest-only mortgage, your monthly payment pays the interest charges on your loan, not any of the original capital borrowed, this means your payments will be less than on a repayment mortgage.

At the end of the term you’ll still owe the original amount you borrowed from the lender and will need to clear this borrowing from an alternate source. This could be from the sale of the mortgaged property, sale of a different property or the use of savings and investments you may have available.

Interest Only mortgages are not right for everybody in fact the vast majority of people should always consider a repayment mortgage over this option but they do still have their merits.

Interest Only mortgages can be used to purchase for residential property and buy to let investment property.

Residential Interest Only Mortgages

When purchasing your residential home the ultimate goal is to clear your mortgage and own the property out right. A such a repayment mortgage will ensure this as long as the mortgage payments are met over the term of the loan.

In certain situations, it is not necessary to reduce the borrowing as repayment of the loan could be coming from a separate source. An example of this could be selling an alternate buy to let property and using the sale proceeds to clear the residential loan. Ultimately a lender will want to see a suitable repayment method to be used for your loan clearance.

Some but not all of repayment methods lenders will consider are:

  • Sale of the mortgaged residential property
  • Sale of and alternate property
  • Savings and Investments

It is your responsibility to ensure that a suitable repayment method is in place throughout the term of the loan.

In certain times it may well be you wish to utilise a mix of different repayment methods. As such as part and part mortgage can be requested. This means some of the mortgage loan is taken on a repayment basis and some on interest only. This allows the borrower more choice and flexibility when setting up their borrowing.

Buy to Let Interest Only Mortgages

When purchasing a buy to let property investors have different goals in mind, some look to capital growth of the investment over the longer term, others look towards income either now or upon retirement. Regardless of the reason the decision of interest only or repayment need to be looked at.

It works in exactly the same way as a residential interest only mortgage.

If looking for income now the having an interest only mortgage means paying lower payments thus increasing the surplus after your mortgage payment and other costs and taxes have been covered.

If looking at income in retirement it could well be an initial repayment mortgage is best suited to reduce the debt as much as possible with a change to interest only later on in life.

If looking for capital growth, then repayment is probably better as it means you will have more of the sale proceeds available upon sale.

The choice will be for you to decide but our buy to let specialist will be able to guide you through the decision-making process

Due to changes over recent years obtaining an interest only mortgage for residential purposes has become increasingly difficult. Some lenders have removed themselves from this type of lending entirely.

Lenders that still provide loans of this type will have minimum requirements that you will need to meet to quality. The amounts vary from lender to lender but can consist of:

  • Minimum income levels
  • Minimum equity figures
  • Minimum borrowing figures

For buy to let mortgages it is easier, typically, lenders will expect an application to be received on an interest only basis as most investors see benefits of this type of borrowing for increasing their yield.

Should I take an interest only mortgage?

Each application should be taken on its own merits and examining your repayment strategy is key to making the correct decision and our advisers will discuss thoroughly with you.

Nicholson Brown Limited is authorised and regulated by the Financial Conduct Authority under register number 671013.

Your home (or property) may be at risk of repossession if you do not keep up repayments on your mortgage or loan secured upon it.

We do not charge for our initial consultation, however we charge a brokerage fee for residential and buy to let mortgage applications. The fee is dependent upon the complexity of your case and is typically up to £500, payable upon completion of the transaction.

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