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Interest Only Investment Mortgages

Everything you ever wanted to know about interest only investment Mortgages

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 19, 2021

Investing in property can be a fantastic way to build a secure future, so it’s no surprise that we hear from countless customers who have ambitions to do just that.

We have helped homeowners from all walks of life get onto the investment property ladder and secure themselves a profitable future, and if that’s something you’re interested in, this guide to getting an interest only mortgage for an investment property is for you.

What is an investment mortgage?

An investment mortgage is a mortgage used to purchase a property that the borrower hopes to make a return on, either through rental income, the sale of the property or both.

What is an interest only mortgage on an investment property?

Well let’s first talk about what it’s not. The most common mortgage is a repayment mortgage, where you pay back the borrowed capital every month, plus interest. An interest only mortgage, however, is where you just pay back the accrued interest every month instead of the mortgage itself. The full loan amount is due at the end of the term.

Usually people go for this when they are confident that they can pay the mortgage back later on through savings, inheritance or another repayment vehicle.

What types of interest only investment mortgages are there?

There are many different investment mortgages that can be arranged on an interest only basis.
These include:

  • Buy-To-Let (BTL) Interest only mortgage
  • Interest only HMO mortgage
  • Interest only holiday let mortgage
  • Interest only Commercial/ Semi-commercial mortgage

Interest only buy to let (BTL) mortgages

Buy-to-let interest only mortgages work similarly to residential mortgages but have different criteria for borrowing amounts and eligibility. Rental mortgages for these properties are largely offered on an interest only basis and can be advantageous because some of them are unregulated, which means they can be handed out on more flexible, bespoke terms. For instance, you can decide if you want to use the proceeds from your rental income to pay back the mortgage or keep it as profit.

Interest only HMO mortgages

Think students and young professionals – House of Multiple Occupants (HMO) are residential properties where 3+ people share living quarters but do not count as a single household (because, according to the government, a single household is either a single person or a family living together). If the HMO has 5+ people sharing or the property is three storeys high, it is often seen as a Large HMO.

Interest only hmo mortgages are slightly more complex – they can have favourable rates of return but can be higher risk, so your choice of lenders will be fewer. Luckily, we work with expert mortgage specialists who can help by offering insight and connecting you with the right lender.

Other factors impacting eligibility include:

  • LTV / Deposit:
    Most set a cap at 75%, but a few can go up to 85%
  • Affordability:
    This is based on expected rental yield and there is the opportunity to use “top slicing” where personal income can help to obtain the mortgage.
  • Repayment strategy:
    Like BTL’s you can just sell property on

Holiday let/interest only rental mortgage

Interest only holiday let mortgages are designed for properties that are used to rent out on a short term basis to travellers and tourists. Often there can be stricter lending criteria for these if it’s to serve as a second home, but if it is your first property, it can be easier.

Holiday lets in the UK are niche product but are readily available. It’s possible to get one of these mortgages abroad by either going to a UK mortgage provider which lends internationally, or approaching a lender in the country where the property is located. Overseas holiday let mortgages can be more complicated, though.

Commercial/Semi-Commercial interest only mortgages

Various types of professional individuals and businesses can apply for an interest only Commercial or Semi Commercial mortgage, including sole traders, limited companies and larger firms. Semi-Commercial usually means having both a residential home and a business premises in one property, for example, a flat with a ground-floor shop. These will almost exclusively call for a specialist lender, as not all providers offer commercial deals.

Am I eligible for an interest only investment mortgage?

So, let’s cut to the chase – what makes someone eligible for an interest only investment mortgage property?

For buy-to-let interest only mortgages the most important thing is how viable the investment is. How much you earn privately is much less of a deal breaker – some lenders have minimum personal income requirements (around £25,000 is standard, but others have no minimum or won’t need to see any personal income at all. Other factors include:

  • LTV/ Deposit:
    Most will lend 75%, some will lend 80%, and a few will lend 85%)
  • Affordability:
    How much will you take from rental income? They will also look at interest coverage ratios.
  • Repayment strategy:
    This could be the sale of the property but most lenders accept alternative repayment vehicles, such as using stocks, shares or other investments/assets to settle the loan.

Interest only HMO mortgages

A lot of lenders will have strict criteria for an interest only HMO mortgage. The number of bedrooms or whether the borrower has experience as a landlord can all count. Some properties of this kind can also require a license from the local council.

Holiday let/interest only rental mortgage

Factors include:

  • LTV / Deposit
  • Affordability
  • Repayment strategy – same as BTLs and HMOs (see above)
  • Whether the property is located in the UK or overseas

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Commercial / Semi-commercial

For these you may require a commercial broker. We work with lots of specialist advisors, so let us help find the right deal for you.

Generally speaking, a larger deposit is required than for BTLs
As these can have a wide range of criteria have a look at our commercial page or make an enquiry for more info by calling 0808 189 2301

Let to buy mortgages

Let to buy interest only mortgages are geared towards borrowers who want to convert their current home into a buy to let and fund the purchase of a new property with the equity that’s released when they remortgage onto a BTL agreement.

Let to buy agreements often involve having two mortgages with the same lender (although using different lenders, as long as the remortgage and onward purchase is completed on the same day, is possible) – a BTL deal on your original home and a new residential mortgage on the property you’re moving to. The BTL mortgage will likely be an interest only landlord mortgage (most of them are) but whether your new residential deal is repayment depends on the deal you negotiate with the lender.

Let to buy eligibility comes down to meeting the lender’s requirements for both a buy to let and a residential mortgage, and the provider will need to be confident that you’re capable of paying them both simultaneously. But there are other factors to be aware of.

Firstly, you will need sufficient equity in your original home, enough to fund a deposit for the new property you’re moving to. You should also be aware that the Stamp Duty hike introduced for second homes in 2016 will apply to let to buy borrowers – so you will need to pay 3% extra for this tax, and that amount will only be refunded if you sell your previous home within three years.

Speak to an interest only investment mortgage expert today

There are lots of options to talk through so why not speak to the advisors we work with.

Call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.

We don’t charge a fee and there’s no obligation or marks on your credit rating.

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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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