Interest-Only Investment Mortgages

If you’re looking at property investment and want to benefit from the profits without committing straight away to a standard repayment structure, an interest-only investment mortgage might be the option to look at.

While you would benefit from only having interest to pay during your term, there are a number of 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 only repaying the interest each month and the and what you accrue over the term of the loan, rather than re-paying 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.

So an interest-only investment mortgage combines these two concepts. It’s essentially a type of finance for investing in property that doesn’t come with 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 – either 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, or 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 rises in the market, or you will have inheritance, savings, or another expected future windfall that would allow this to happen.

This approach does come with the obvious risks however, such as potential housing crashes leading to negative equity or circumstantial changes, which is why hiring a mortgage broker who specialises in investment property finance would be crucial in working through your decision so you understand the dividends and implications fully.

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 as well as 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 for a job if you are retiring or want to leave the workplace, or if you see property as a future pension-style investment for old age or to pass on to heirs.
• HMO mortgages: House of multiple occupancy mortgages are for when more than three people live in a house with shared facilities, but aren’t a family. This could be for private student accommodation or for house-shares for young professionals where the cost of living makes single occupancy unaffordable. Landlords who take on this kind of mortgage face a more stringent application process due to the nature and complexity of the loan.
• Holiday let mortgages: If you want to buy a property in the UK or abroad with the purpose of letting 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 buying abroad can prove more complicated. This is a good option if you want to invest in property but want to enjoy holidays there at the same time, 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 as investments for everyone from sole traders to large organisations. For example, to buy a building that houses a restaurant, nursing home or offices. 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 as well as 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 in the business of ‘flipping’ a house – altering a building into a desirable home. There are a number of product options in this range depending on what your intentions are, the extent of work that needs doing, 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 that you will need assistance with: finding a good interest rate and finding 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 who has access to the entire market and can scan the best deals out there. After working to understand your unique set of circumstances and financial position, a good investment mortgage broker will provide support and advice, as well as giving 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 that there is no one-size-fits-all tick box with any of the loans. The discretion lies with each mortgage lender, as with most niche areas of lending, however the main factors are usually based on:

• Loan-to-value ratio: You will need to be in a position to put down a healthy deposit in order to get an interest-only investment loan, with the very top limit being an 80% mortgage, but more often it’s 70-75%.
• Caps on purchase: Some lenders will 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 that will cover your 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 loan-to-value ratio and interest rate you are likely to receive, and the more favourable interest rate you will secure too. Banks will place the most emphasis on the probability of your financial stability – and that of your property – when your term comes to an end 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 HMO, holiday let or commercial mortgages.

There are intricacies and small-print with each lender which don’t follow a pattern. For example, some more small, 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%, with both large and small banks providing these products. They include…

• Barclays
• HSBC
• Castle Trust
• Gatehouse Bank

Each mortgage type comes with its own restrictions though, 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 to live in. 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 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 that equity in your first home is a sufficient enough sum to act as a healthy deposit towards your second, and bear in mind that second homes now have an additional 3% in 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 0808 189 2301 or make an enquiry today and we’ll get you started with a free, no-obligation chat.