How To Get an Interest-Only Mortgage as a First-Time Buyer

Interest-only mortgages were once a popular and affordable way to get on the property ladder while keeping monthly repayments low. Lenders’ appetite for this type of borrowing has waned since the financial crash 2008, but it is still an option for some first-time buyers.

In this article, we’ll outline whether interest-only mortgages are a genuine option for first-time buyers, the eligibility criteria, and why a whole-of-market mortgage broker can improve your application’s chances of success.

Can a first-time buyer get an interest-only mortgage?

It’s possible, but it’s not easy, as only a handful of lenders offer them.

Many providers are reluctant to approve this type of loan due to concerns about repayment vehicles failing to produce the amount required to clear the balance when due. For this reason, interest-only is seen as a higher-risk method than repayment. This also means eligibility criteria are stricter.

However, given the right circumstances, it can still be the best way to take your first step on the property ladder. However, as an inexperienced buyer, you will need the assistance of a broker to ensure the deal is the right choice for you and that you package your application according to a prospective provider’s requirements.

Are they a good idea for first-time buyers?

That depends very much on individual circumstances, but it is worth exploring. An interest-only mortgage can often get you on the property ladder, allowing you to switch to repayment terms when you are in a stronger financial position.

If, for example, you have inherited a sum of money, that will amount to a substantial deposit. However, interest-only could be the solution if you’re still worried about committing to a repayment mortgage due to the monthly cost or rising interest rates.

As a first-time buyer, you should always speak to an independent mortgage broker to ensure you look at all options, including interest-only, before taking out your first mortgage.

What kind of deal could you qualify for?

While it’s possible to borrow up to 100% on a repayment mortgage, approval for interest-only usually requires a deposit of at least 20%. Some lenders will even insist on a deposit of up to 40% of the property’s value.

Rates start at around 2.15% with a 40% deposit.

Examples of the difference in repayment amounts for first-time buyers between interest-only and repayment terms with different deposits can be seen below:

As you can see, a larger deposit means you get a better interest rate, but that rate remains the same whether you take repayment or interest-only terms. With a repayment deal, however, you pay significantly less over the term of your mortgage because your capital balance – the amount on which your interest is calculated – reduces with each payment.

Aside from a sizeable deposit, eligibility for interest-only might depend on:

• Income: Some lenders have a minimum income threshold of £50,000 for single or joint borrowers.
• Repayment vehicle:  You will need clear plans for settling the loan when it expires (selling the property or switching the mortgage type will not be considered a solution).
• Credit record: Bad credit could be a barrier to a first-time buyer’s interest-only mortgage, as there are so few lenders out there. Multiple applications can also harm your credit file, so it’s important you identify the right lender the first time.
• Experience: Most providers do not prefer interest-only lending, so they can be reluctant to approve a first-time buyer mortgage of this type. It is generally, though not exclusively, reserved for those with proven experience in mortgage borrowing, which can be an added barrier when looking to buy your first home.

How much you could borrow

Lenders typically set the amount you can borrow at 4.5 times your annual income. So, with a combined annual salary of £50,000 pa, the maximum loan would be £225,000 if you meet all lending criteria. Given the right circumstances, higher income multiples are available, and some professionals can borrow up to 7 times their income.

Remember, though, that getting approved for higher income multiples may not be as easy if you are borrowing on interest-only.

Find out how much you could borrow using our mortgage affordability calculator:

Alternatives to consider

The main benefit of interest-only borrowing is that it keeps monthly payments down. But it’s not the only way to ensure your mortgage is affordable if you’re looking to buy your first home with tight finances.

You could also try:

• Repayment mortgage over a longer term: These days, it’s not uncommon to take out a mortgage over 40 years and then look to reduce the term as you build up equity in your property and remortgage.
• Part-and-part mortgage: This is the middle ground and can give you the best of both worlds. Part of your loan will be on interest-only terms to help make sure your monthly repayments remain affordable. The rest will be on a repayment mortgage, so you can start to reduce your balance and build up equity.

Can you get an interest-only buy-to-let mortgage as a first-time buyer?

Possibly. Most buy-to-let mortgages are interest-only and provided you meet the lenders’ criteria; you can apply.

You will most likely need to have:

• A deposit of at least 40%
• A clean credit file
• Sufficient regular income to cover the monthly repayments during times when the property is unoccupied

For some borrowers who can’t afford a mortgage in their area, buying an investment property in a cheaper area is a way of getting onto the property ladder.

If you’re considering this, keep in mind that lenders expect your rental income to cover a minimum of 125% of the mortgage payments. In some cases, up to 140% is required.

One sticking point for first-time buyers is that most buy-to-let lenders prefer you to have some letting experience. Without that, your pool of lenders will be diminished, and you will need a rock-solid business plan to convince specialist lenders that your investment is sound.

If considering this route, you must speak to a buy-to-let mortgage broker before applying.

How a broker can help first-time buyers

With so few lenders in this niche, finding one whose risk profile matches your circumstances and structuring your application to get it approved will be a real challenge.

Your best bet is to speak to an experienced broker who can assess your situation in relation to the entire market and advise you on the best course of action.

Their in-depth knowledge of this type of repayment method and who offers it to first-time buyers will allow them to quickly identify not only whether an interest-only mortgage is feasible for you, but also whether other options would suit you better.

Can you get one of these mortgages through Help to Buy?

No. Government schemes designed to help buy your first home are only available on repayment terms and are aimed at those with little or no deposit.

If it looks like it will take years before you can afford the deposit for an interest-only mortgage, speak to a broker about whether Help to Buy might be a better option.

Get matched with an interest-only mortgage expert

Before considering applying for a first-time buyer interest-only mortgage, it would be in your best interest to seek advice from an independent broker. Failure to do so will likely result in rejections or an overly expensive offer.

With our broker matching service, you will be paired up with an interest-only mortgage advisor who understands the complexities of the market and the alternative forms of borrowing that might be more appropriate in some circumstances.

After a brief telephone chat to understand your financial situation and plans, we’ll identify the right broker to find you the best deal.

Call today on 0330 818 7026 or enquire online to arrange a free no-obligation chat.