Interest Only Mortgages

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 alternative 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 can be used to purchase and remortgage both residential property and buy to let investment property.

It is also commonly used with commercial mortgages and bridging finance.

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 this thoroughly with you.

If you already have an existing mortgage on your current home we are able to act on your behalf to transfer this across to a new property. Our advisers will deal directly with your current lender to ascertain the exact options they are able to offer and also compare this to the deals available across the market.

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

Residential Interest Only Mortgages

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

In certain situations, you may decide that repayment of the loan is coming from a separate source. An example of this could be selling an alternative 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 an alternative 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 a 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.

Assessment & Availability.

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 requirements vary from lender to lender but can consist of:

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

Risks of taking an interest only mortgage

Warning – this is a reminder that the debt is not reducing with an interest only mortgage and you may have to sell the property to clear the debt.

If you do not wish to sell your home and have no way of clearing the outstanding amount the lender will repossess the property to force its sale.

Buy to Let Interest Only Mortgages

Buy to let mortgages are typically set up on an interest only basis and sale of property is always considered an acceptable source of mortgage repayment. Most investors see benefits of this type of borrowing for increasing their yield.

They can of course be set up on a repayment basis if this is suits your investment goals.

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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