Interest-Only Investment Mortgages Explained

If you’re considering property investment and want to benefit from the profits without immediately committing to a standard repayment structure, an interest-only investment mortgage might be the option for you.

While you would benefit from only having the interest to pay during your term, there are several factors you should consider first, including what deposit you’ll need, who might lend to you, and how you’ll pay it back. Let’s look in more detail.

What is an interest-only investment mortgage?

Investment properties are different to straightforward residential properties – when you live in the property you have a mortgage on and gradually pay off the capital – because they are intended to make a return for you.

An interest-only mortgage involves repaying only the interest each month and what you accrue over the loan term rather than the total interest and capital itself during the mortgage term. You will need to find a way to pay the capital outstanding at the end of the term in one lump sum instead.

An interest-only investment mortgage combines these two concepts. It’s essentially a type of finance for investing in property that doesn’t require mandatory capital repayments.

Why would you get an interest-only mortgage for an investment property?

Your reasons for taking on this kind of loan are to make money immediately or in the future. Only paying the interest each month keeps your current monthly payments low, with a view to either taking revenue from the rental earnings every month, making a profit when the house sells in the future, or both.

You would choose an interest-only mortgage on an investment property if you were confident that you would be in a position to pay back the loan in full at the end of the term, either because you would make a profit after significant house prices rise in the market, or you will have inheritance, savings, or another expected future windfall that would allow this to happen.

However, this approach does come with obvious risks, such as potential housing crashes leading to negative equity or circumstantial changes. That is why hiring a mortgage broker specialising in investment property finance would be crucial in helping you work through your decision so you fully understand the dividends and implications.

Types of interest-only investment mortgages

There are a number of variations on investment property mortgages where interest-only mortgages can be beneficial:

• Buy-to-let mortgage: Hopefully, your rental income will cover the monthly mortgage payments that go to the lender and give you a profit. This option works well if you’re hoping to start or add to a property portfolio, as any income can be used towards renovations or improvements on other properties in your growing business. This is also a good way of replacing an income from a job if you are retiring, want to leave the workplace, see property as a future pension-style investment for old age, or pass it on to heirs.
• HMO mortgages: Multiple-occupancy mortgages are for houses where more than three people live in a house with shared facilities but aren’t a family. This could be for private student accommodation or house-shares for young professionals where the cost of living makes single occupancy unaffordable. Due to the nature and complexity of the loan, landlords who take on this kind of mortgage face a more stringent application process.
• Holiday let mortgages: If you want to buy a property in the UK or abroad to let it out for holidays, an interest-only loan gives you similar benefits to buy-to-let mortgages. It is a relatively niche market, though there are plenty of products out there, but bear in mind that buying abroad can prove more complicated. This is a good option if you want to invest in property but want to enjoy holidays there simultaneously while your paying guests cover the costs until the term ends.
• Commercial mortgages: Not all lenders offer commercial deals, but a broker can help you find those who specialise in these interest-only loans. The repayment options are often more flexible, which can suit borrowers whose income generation fluctuates. Commercial properties can be lucrative investments, from sole traders to large organisations. For example, to buy a building that houses a restaurant, nursing home or office. They also work well for people who want to purchase a property to trade for themselves. Semi-commercial loans are possible for those who run their businesses at home.
• Buy-to-renovate mortgages: These are designed for investors who need a mortgage to cover the cost of a property and the renovation work required. Most lenders draw the line at derelict, uninhabitable or major conversions. However, they are open to these ‘fixer-upper’ mortgages to help investors who are ‘flipping’ a house – altering a building into a desirable home. Several product options in this range depend on your intentions, the extent of work needed, your credit history and whether you’re an experienced property developer.

How a broker can help secure an investment mortgage

There are two key elements of this kind of borrowing: you will need assistance with finding a good interest rate and a lender who will accept you. This is where a highly respected, well-connected and experienced advisor comes in.

Knowing which lenders provide the specialist loan you’re looking for is often the hardest part. Find a broker with access to the entire market and can scan the best deals. After understanding your unique circumstances and financial position, a good investment mortgage broker will provide support and advice, as well as give you a practical service in finding the best deal for you and helping with your application.

Interest-only investment mortgages have different sets of rules and criteria for each kind of loan, and they are often unregulated, which gives more lender flexibility but can make deciphering the principles a minefield.

Eligibility criteria

The criteria are varied, and you should recognise no one-size-fits-all tick box for any loan. The discretion lies with each mortgage lender, as with most niche areas of lending; however, the main factors are usually based on the following:

• Loan-to-value ratio: You will need to be able to put down a healthy deposit in order to get an interest-only investment loan. The very top limit is an 80% mortgage, but more often, it’s 70-75%.
• Caps on purchase: Some lenders only lend up to a particular sum. For example, many HMO mortgages are capped at £1m.
• Affordability: Lenders are less preoccupied with traditional regulations such as salaries than they are about how you’ll pay the loan back. However, they will expect to see proof of sufficient income to cover their personal and investment mortgages. First-time landlords are usually given tighter restrictions, but generally, lenders have the autonomy to ‘sense check’ affordability.
• Repayment strategy: The stronger your repayment intentions, the better your loan-to-value ratio and interest rate you will likely receive, and the more favourable interest rate you will secure. Banks will place the most emphasis on the probability of your financial stability – and that of your property – when your term ends, when they will recoup the cost of the whole mortgage.

Which lenders provide investment mortgages?

There are many lenders out there who offer some kind of interest-only investment loan; however, some niches might be harder to come by in the mainstream, such as HMOs, holiday lets, or commercial mortgages.

Each lender has intricacies and small print that don’t follow a pattern. For example, some smaller, niche lenders provide the most flexibility. While the norm is about 70-75% loan-to-value ratio, some lenders will stretch up to 85% for HMO mortgages, which is usually the most risky and strict mortgage criteria.

These mortgage providers include…

• Kent Reliance
• Foundation Home Loans
• Kensington Mortgages

There are far more lenders out there, with a maximum of 75%, and both large and small banks provide these products.

They include…

• Barclays
• HSBC
• Castle Trust
• Gatehouse Bank

Each mortgage type has restrictions, such as number of bedrooms versus loan-to-value caps for HMOs, whether the property is UK-based for holiday let loans, or whether you’re an experienced landlord borrower.

Let-to-buy mortgages

This is when you change your current home into an investment property, releasing its equity to buy a new home. With a let-to-buy agreement, you will have two mortgages, either with the same lender or two different ones. One is the buy-to-let deal on your original home, and the other is a new residential mortgage on your new property.

It may be possible to take out both mortgages on an interest-only basis.

Lenders will expect you to meet the criteria for both types of mortgage and will want to see evidence you can afford to pay both simultaneously. It will also be expected that the equity in your first home is sufficient enough to act as a healthy deposit towards your second. Remember that second homes now have an additional 3% stamp duty attached to them when purchasing.

What are the alternatives?

If interest-only isn’t for you, you could try to get a capital repayment mortgage. This would cost you more in monthly payments, but you would benefit from having paid off the whole cost of the property by the end of your term, leaving you far better off in the future.

Other financing options include…

• Bridging loans for short-term solutions
• Development finance for borrowers who are building or heavily renovating a property
• Releasing equity from your current home
• A second charge mortgage
• a personal or business loan

Get matched with a specialist investment mortgage broker

The brokers we work with are hugely respected in their field and understand the niche of investment financing. They are interest-only mortgage experts with access to the entire market and have contacts and experience that can bring real results to the outcome of your mortgage deal.

We can get back to you today to begin matching you to the right expert for your circumstances so you can secure your investments for your future as soon as possible. Call us on 0330 818 7026 or make an enquiry today, and we’ll get you started with a free, no-obligation chat.