These days it’s much harder to get a residential mortgage on interest only terms. You have to jump through more hoops but it is possible, as Beckie explains.
As the term suggests, with an interest only mortgage, borrowers only pay the interest on the loan. This means that when the mortgage term ends the borrower will still owe the original amount (capital) borrowed and will need to have a way of repaying it (known as a repayment vehicle).
There are many different repayment vehicles but typically these are:
• Sale of the property or other asset
• Large pension pot
Interest only terms are commonly used by landlords because lenders feel comfortable having the rental property sold to repay the buy to let mortgage.
Getting interest only terms on a residential mortgage is much more difficult because lenders have a duty to lend responsibly and so understandably, are less comfortable with borrowers selling their home to repay the loan, even if the borrower intends to downsize.
That’s not to say that you can’t get interest only terms on a residential mortgage but your proposed repayment vehicle will be scrutinised and you may have to meet additional criteria such as having:
- A larger deposit. Often lenders will go to 70% LTV on interest only terms but with the caveat that the borrower already has the full loan amount saved or in another investment vehicle. At 50% LTV it is more likely that the borrower will get interest only terms without having the loan amount up front.
- Higher than average income. Depending on the lender you may need to earn anywhere between £50k and £100k as a minimum before you qualify for interest only.
If you are looking for a mortgage on interest only terms, do get in touch to talk through the options that might work for your circumstances.
Beckie Pepperrell has left Mortgages for Business for pastures new. For more information or for any questions relating to this blog, please contact the Residential Team on 0345 345 6788, where one of our consultant mortgage brokers will be happy to assist.
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