What Is an Interest-Only Mortgage?
An interest-only mortgage is a type of mortgage where you only make interest payments each month, as opposed to the interest and capital payments you would make on a repayment mortgage.
Making interest payments each month stops the mortgage balance from increasing but doesn’t go towards paying it off. You pay the full mortgage balance at the end of the mortgage term or when the property is sold.
The interest-only mortgage lender will require that you provide evidence of a suitable repayment vehicle – i.e. how you’re going to repay the mortgage at the end of the term.
Interest-Only Residential Mortgage
Most residential mortgages are repayment but some people find that residential interest-only mortgages suit them better, typically because the monthly payments are lower.
Would an Interest-Only Residential Mortgage Suit You?
You may find an interest-only residential mortgages useful if:
- You have an alternative repayment strategy – e.g. you have equity in other properties that you could sell, or you have other investments
- You’re planning on downsizing at the end of the mortgage term when it’s time to repay the mortgage – e.g. you intend on moving after your children have left home as you don’t want to maintain a big house
- You want to remortgage onto an interest-only product because you want to reduce your monthly payments and you have a suitable repayment vehicle. Learn more about the remortgage deals available now
Interest-Only Buy-to-Let Mortgage
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Process for Buying a Home/Remortgaging
1. First Conversation with Adviser
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting – whatever suits you. Your adviser will ask you some questions then go away and search mortgage deals to find you the best product for your circumstances and future needs. They’ll organise a follow up during which they’ll present you with what they’ve found.
2. Decision in Principle
Once you’re happy with their recommendation, they’ll go about securing your DIP (Decision in Principle) - which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property.
3. Offer on Property/Remortgaging
After the lender has agreed your scenario, you’ll be in a position to make an offer on a property or move forward with remortgaging.
4. Pre-Application and Submission
Following the acceptance of your offer, we’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5. Lender Underwriting and Valuation
The lender will underwrite your application; this basically means they’ll verify that the information you’ve provided is correct and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property to make sure there are no significant problems with it.
6. Mortgage Offer
If the lender is happy with everything they’ve found, they’ll send you a mortgage offer. They’ll also send us a copy.
After you’ve accepted your mortgage offer, you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase of the property/remortgaging. If you're buying, you’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
8. Exchange and Completion
If you’re buying a property, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor; it’s at this point that you would put down your deposit and be legally bound to the property. The purchase will complete when the money is transferred on an agreed-upon date. If you’re remortgaging, then your conveyancer/solicitor will set a date to draw down the funds and pay off any existing lender(s) once the mortgage offer’s released.
Interest-Only Mortgage Criteria
Below we’ve listed some criteria you must meet to get an interest-only mortgage:
- You must provide a minimum deposit of 25% for an interest-only mortgage
- You must meet a minimum income requirement set by some lenders
- You must be able to provide evidence of how you will repay the mortgage once the term is complete - e.g.
- You’ll sell the property and use the funds from the sale to repay the mortgage
- You’ll have access to funds by the end of the mortgage term
- You have financial investments
- You have equity in other properties that you intend to sell
Interest-Only Mortgage Calculator
Interest-Only Mortgage FAQs
Who Are the Best Interest-Only Mortgage Providers?
A lot of lenders offer interest-only products. There’s no single, best provider as the best provider for you will depend on your unique situation.
Can You Get an Interest-Only Mortgage with a 90% Loan-to-Value?
For most lenders, the maximum LTV (loan-to-value) you can get on an interest-only mortgage is 75%. However a few lenders will allow LTVs up to 80%.
There’s also the other possibility of a part interest-only and part repayment mortgage. Some lenders will allow part interest-only and part repayment mortgages up to 85% LTV, but not 90%. For more information about this kind of specialist mortgage arrangement, speak to an adviser on: 0330 433 2927.
What Are Some Interest-Only Mortgage Rates?
You can compare the best interest-only mortgage rates currently on the market by using our free best buy tool.