How To Get An Interest Only Mortgage
The good news is that in recent years a number of lenders have relaxed their criteria for this type of lending. Things to be mindful of include:
- Lenders are keen understandably to ensure at the end of the mortgage term the loan will be repaid. Criteria for lenders will vary but all will want to understand how you intend to pay off the mortgage at the end of the term.
- A repayment vehicle strategy will be required. Some lenders will accept sale of property as a way of paying off the debt. Some will want to see a saving plan such as regular investment into ISAs or investment vehicle. Where sale of property is not acceptable to lenders, they will often want to see statements of your investments as evidence that a repayment vehicle is in place.
- Most lenders will only offer an interest only mortgage if the loan to value (LTV) is lower than a set percentage of the value of the property you are mortgaging.This is typically 75% LTV or less. There are a few lenders that will go up to 85% LTV but you will need to speak to our independent mortgage team to access these rates. Some lenders will require a part interest and part capital repayment strategy for any borrowing over a set limit e.g. 60%. So if you have a 25% equity in your property, a lender may require that 15% of borrowing is on a part and part basis with 60% fully on an interest only basis.
Interest Only Mortgage - What Are The Income Requirements?
This will depend on the lender...
Some lenders have no minimum income requirement although they may cap what you can borrow on an interest only basis up to e.g. 65% LTV (Loan To Value). With the balance if you are borrowing more than this being on an interest & repayment of capital basis.
A number of lender who offer higher income multiples when it comes to borrowing e.g. 5 x income will require your salary to be over a set amount pa e.g. £70,000. Different lenders will also have different criteria regarding how you pay the mortgage back.
Some interest only mortgage lenders will accept sale of property; some will have conditions on this e.g. NatWest require you to have at least £200k of equity in your property at time of sale.
With some lenders it is possible to split your mortgage repayments on a interest only mortgage and a capital repayment mortgage basis.
This will reduce your mortgage balance over time, but at the end of the term there will still be an outstanding capital sum to repay. For advice on your interest only options click here
Using Sale of House as a Repayment Strategy
Lenders take different approaches to sale of house as a exit strategy for paying off a mortgage. For many people downsizing to a smaller home later in life is a logical step and often it will be to a part of the country where house prices are lower.
Some lenders will want to know where you intend to downsize to so they can assess the valuation of properties and ensure you plan is plausible.
A key consideration for lenders is affordability when they lend. In assessing whether an interest only mortgage is right for you income criteria will come into play.
Typically lenders will want to see an individual with an income of at least £50,000 or a household income of £75,000 to lend on a interest only basis. This criteria will vary so speak to a broker such as ourselves will help you get the right deal for your circumstances.
Why do people Choose an interest only mortgage?
The main reason is to keep monthly costs to a minimum.
1. Has your initial mortgage deal come to an end?
By switching to a better deal with a different mortgage provider, an interest only mortgage could potentially allow you to benefit from lower interest rates and lower monthly mortgage repayments.
2. Are you looking to raise money?
By remortgaging you may be able to releasing equity in your home.
People often remortgage to provide money for:
- Home improvements
- New Kitchen
- New En-suite bathroom
- Consolidate other existing debts.
3. Borrowing in retirement interest only up to age 80
Free up funds from your home so you can live the life you want to.
This could be right for you if you are looking for a good alternative to equity release or you are looking to home improvements or raise funds for something special e.g. a child's wedding or first home deposit.
You can borrow up to 30% of the value of your property and your property must be worth at least £250,000 to qualify.
Independent Mortgage Advice
Remortgaging is particularly popular at the moment as interest rates are low.
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Whether it will be a good idea for you to remortgage depends on a number of factors, including your goals and your personal circumstances.
However, in general, if interest rates are lower than you are currently paying on your mortgage, it may be a good time to remortgage.
If interest rate are higher than you are currently paying, it may be better to look at other options, such as a second mortgage or a personal loan (if you aim is to borrow more).
If you are not sure whether now is the right time to remortgage, it is a good idea to speak to an independent mortgage broker who will be able to offer impartial advice.