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First-Time Buyer Interest-Only Mortgages

Wondering whether you can get an interest-only mortgage as a first-time buyer? Find the answers to all your questions in our comprehensive guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 24, 2022

Interest-only mortgages were once a popular and affordable way for people to get on the property ladder while keeping monthly repayments low. Lenders’ appetite for this type of borrowing has waned since the financial crash of 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 there are only a handful of lenders offering 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 is stricter.

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

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Are they a good idea for first-time buyers?

That very much depends on individual circumstances but they are definitely an avenue worth exploring. An interest-only mortgage can often get you on the property ladder with a view to switching onto 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, but you’re worried about committing to a repayment mortgage due to the monthly cost or rising interest rates, interest-only could be the solution.

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:

Term Type Property Value Deposit Amount Interest Rate Monthly Repayment Total Repayable
25 years Interest-only £200,000 £50,000 2.3% £288 £333,110
25 years Repayment £200,000 £50,000 2.3% £658 £253,802
25 years Interest-only £200,000 £80,000 2.15% £215 £266,361
25 years Repayment £200,000 £80,000 2.15% £517 £202,788

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 how you intend to settle the loan when it expires (selling the property or switching mortgage type will not be considered a solution).
  • Credit record: Bad credit could be a barrier to a first-time buyer 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 first time.

Experience: With interest-only not being the preferred method of lending for most providers, 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 of 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 will be able to borrow up to 7 times their income.

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

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

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Mortgage Affordability Calculator

Our affordability calculator can tell you how much you can potentially borrow from a mortgage lender. Simply enter your total household income below and our calculator will do the rest.

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You could borrow up to 

Most lenders would consider letting you borrow

This is based on 4.5 times your household income, the standard calculation used by the majority of mortgage providers. To borrow more than this, you will need to use a mortgage broker to access specialist lenders.

Some lenders would consider letting you borrow

This is based on 5 times your household income, a salary multiple you might struggle to qualify for without the help of a broker. This income multiple is not widely available to customers who are applying directly with a lender.

A minority of lenders would consider letting you borrow

This is based on 6 times your household income, a salary multiple you will struggle to get without a broker. Six-times salary mortgages are usually only available under very specific circumstances.

Get Started with an expert broker to find out exactly how much you could borrow.

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Alternatives to consider

The main benefit to 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 while finances are a bit tight.

You could also try:

  • Repayment mortgage over a longer term: It’s not uncommon to take out a mortgage over 40 years these days and then look to reduce your 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 the area in which they live, 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 will expect your rental income to cover a minimum of 125% of the mortgage payments – in some cases, up to 140%.

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 their investment is sound.

If considering this route, it’s essential you 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 way forward.

Their in-depth knowledge of this type of repayment method – and who offers them 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 entertaining the notion of 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 is only likely to lead to 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 gain an understanding of your financial situation and plans, we’ll identify the right broker to take on the baton of finding you the best deal.

Call today on 0808 189 2301 or enquire online to arrange a free no-obligation chat.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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