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Interest-Only Mortgage Criteria

Everything you need to know about eligibility for an interest only mortgage

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 12th February 2020 *

Interest-only mortgages are less common than they used to be, perhaps because they are often viewed as riskier than repayment mortgages.

However, mortgage providers continue to offer interest-only mortgage agreements and the number of options continue to grow.

But what are the criteria for interest-only mortgages and how easy is it to find a lender with the right eligibility rules for you?

Read on for a comprehensive overview or click a link to jump ahead: 

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What is an interest-only mortgage?

Interest-only mortgages are designed so the borrower only pays the interest charges each month. The capital borrowed is not paid back until the end of the term. They are available to borrowers who meet specific income requirements and have a strategy for repaying the capital borrowed at the end of the term.

The separation between the interest payments and the mortgage capital repayment means it’s vital that you find a different way to raise or save the money to repay the full mortgage amount at the end of the mortgage term, usually 25 years although the term length is flexible. 

Mortgage lenders will want to know how you will be repaying the capital at the time that you make your application. This is called a repayment vehicle and can be via ISA savings, selling another property, a monetary inheritance, several different investments or, in the case of a buy-to-let mortgage, using no set exit strategy at all.

Can I get an interest-only mortgage?

You can still get a residential interest-only mortgage, provided you meet certain eligibility criteria.

Although the eligibility criteria for interest-only deals has tightened, many are still able to get one. Individuals must have a plan for repaying the debt in place as well as meet the mortgage lender’s other requirements:

  • You must be able to prove your annual earnings or, for joint applications, combined annual income, is enough to afford the loan you want to borrow.
  • You also need to raise the required deposit and show the mortgage lender you can repay the loan. Each lender has different criteria but the advisors we work with are experts who know which lenders to approach based on your own circumstances.

What are the options when you reach the end of the term?

The key element for an interest-only mortgage is to have a repayment vehicle in place to pay off the mortgage at the end of the term. When the end of the interest-only mortgage term arrives, there are various options:

  • Ask for a remortgage with your current mortgage lender to extend the term. Depending on your borrowing profile, the interest-only mortgage deposit and the equity you have in the property you can apply to remortgage with your existing lender.
  • Remortgage to a lender that will allow a longer term/age. Another option is to switch to a mortgage lender who has different rules on the length of the term and how old you can be on application.
  • Remortgage and switch to a repayment mortgage. If you meet the eligibility requirements you could switch your interest-only mortgage to a repayment agreement.
  • Sell the property and rent or downsize. At the end of the interest-only term you could downsize your property using some of the equity to repay the loan or use the proceeds to repay the mortgage and then start renting.
  • Repay the loan with cash. This is typically from your own savings, or using the 25% tax-free portion of your pension. 
  • Equity release. If you have enough equity in the property and you are over 55, you could release equity to repay the interest-only loan.

What are the acceptable interest-only repayment strategies?

Each mortgage lender is different and has their own weight and emphasis on criteria for residential interest-only agreements, various types of repayment strategy and what is acceptable.

Some mortgage lenders may be happy to accept one type of repayment strategy but reject another. If you would prefer to use multiple repayment strategies, speak with one of the advisors we work with who can find lenders ready to accommodate this approach.

Most banks and building societies will want to see evidence of one or more of the following repayment vehicles to show that you’ll be able to repay the loan at the end of the term:

Sale of property

This means you will sell the property you are buying to repay the loan. Generally, this is considered “downsizing” and as a result there needs to be enough equity in the property. Most mortgage lenders don’t accept this strategy, of those that do, some require £200,000 equity, a few £150,000, and one or two accept £100,000.

Alternatively, you could agree to the sale of another property and use the equity towards repaying the loan amount.

Investment methods

You can choose the following to repay your home loan:

  • ISA: You will use ISA savings or investments to repay the debt.
  • Investment bonds: You will use bonds or investments as a repayment vehicle. The mortgage lender will want to see evidence of their value and projected growth.
  • Stocks and shares. You will sell stocks and shares investments to repay the loan. You must show evidence of their value and bear in mind that lenders understand that the value can go up or down.
  • Unit trusts. You will sell your unit trusts to pay off the loan. Again, you must show evidence of the value.

Pension lump sum

If applicable, you can put your pension lump sum towards repaying your mortgage. This is a 25% tax-free lump sum from your pension pot.

Bear in mind that if you want to withdraw all or a portion of the remaining 75% of your pension, it will be taxed as income. By withdrawing you could face a big tax bill and not have enough money for your retirement, so if your tax-free lump sum falls short of your repayment, you may wish to combine it with another repayment method such as savings or sale of a property.

Endowment policy

An endowment policy was a common strategy to repay loans on interest-only mortgages but often the expected growth failed to materialise, leaving borrowers short at the end of the term.

They are still an option, but you must convince the mortgage lender that they will grow as projected to repay the loan. Usually, you will need confirmation of the projection from the company that sold you the policy in the last 12 months.

Other assets

Certain mortgage lenders will accept other assets as exit strategies if you can show that they will cover the loan at the end of the mortgage term. These assets may include valuable artwork, jewelry, or stocks/shares.

Is there a minimum value for my repayment strategy?

Lenders will want to know that your repayment strategy will provide the capital sum required to repay the money you borrow on your interest-only mortgage. It is understood that most repayment vehicles are designed to grow overtime so you don’t have to have the exact sum in ready cash when you take out the mortgage.

However, you must be able to demonstrate that the repayment strategy is sound and will meet the needs when the mortgage term comes to an end.

Some mortgage lenders may have rules that any single option must be above a minimum value. Thankfully, as all lenders are different, just because you’ve been rejected by one, it doesn’t mean there isn’t a solution available, so it is still worth speaking to one of our expert advisors.

Do I need a repayment strategy for a buy-to-let?

With buy-to-let mortgages, there is usually no requirement to have a repayment vehicle because they are seen as an ‘unregulated’ financial product and don’t have to meet the same requirements as a residential mortgage. This means the customer can use the proceeds of the rent to keep or to gradually repay the debt.

At some point however, the borrower will reach the end of the mortgage term and be required to repay in some form. This may perhaps be selling the property or refinancing to extend the term – however, with some mortgage lenders this can exceed their maximum age limits. Thankfully, there are several lenders willing to lend into retirement, and a handful have no maximum age restrictions.

How much can I borrow on an interest-only mortgage?

How much mortgage you can borrow will depend entirely on your circumstances, including your income, deposit amount, credit history, whether you’re looking for a residential or buy-to-let deal, and your income type.

What deposit do I need?

Mortgage lending is based on how much you want to borrow in relation to the value of the property. This is known as the loan-to-value (LTV) ratio. If you put down a £30,000 deposit on a house worth £300,000, then you own 10% and need to borrow 90%. This means your LTV ratio is 90%.

Lenders often require different LTV ratios depending on whether you are borrowing for a residential or buy-to-let mortgage, and whether you’re borrowing on repayment or interest-only.

The good news is that there are more mortgages available for higher LTV ratios and more lenders are offering interest-only mortgages. These days  all mortgage providers have to follow tighter lending eligibility criteria due to the lending rules introduced after the Mortgage Market Review (MMR) in 2016, which is why conditions for interest-only agreements are stricter.

To get an interest-only mortgage, most lenders want you to have an LTV ratio of 75% or lower, some will go up to 80% and a few will go to 85% which means you must put down a deposit of 15%.

The advisors we work with are whole-of-market brokers and can match you with the best possible mortgage rates available and the lowest deposit interest-only mortgage products. Make an enquiry for a free, no-obligation chat and find out what rates you might be able to get on an interest-only basis.

Do mortgage lenders set a minimum income?

Most mainstream mortgage lenders offer residential interest-only mortgages with no minimum income requirements but will run your details through a mortgage calculator to ensure the loan is affordable.

Some mortgage lenders require relatively high incomes. A handful of providers will accept a combination of income and other repayment strategies, and the criteria becomes slightly more relaxed if you apply for a ‘part and part’ mortgage where some is interest-only and some on a repayment basis.

If a lender's affordability assessment does include minimum income requirements it will usually be a minimum of £50,000 for an individual or £75,000 for a joint application. Bear in mind, however, that all lenders are different and have different policies for different forms of income, and not all require a minimum income for interest-only mortgages.

What type of income do lenders accept?

Accepted income types are as follows, but how they are assessed can vary between mortgage lenders:

  • Fixed Income (wage/salary): This covers most people on a fixed annual income and almost all mortgage companies will lend at a multiple of the annual salary
  • Variable Incomes (commission/bonus): If you have a basic salary plus commission or a bonus which is common for certain types of jobs, you need to provide evidence of the likely amount of commission or bonus you will get.
  • Self-employed (net profit / salary + dividends): To get an interest-only mortgage for the self-employed you have to show your accounts and the amount you can borrow is based on your net profit, usually times the same multiplier as for employees, but as our guide on self employment with 1 years accounts shows, there are lots of options, even if you only have one years’ accounts.
  • Part-time: Your borrowing limit will be set against your part-time earnings and any other income.
  • Temp workers: Temporary workers can still use form P60 as evidence of annual income even if they’ve had multiple jobs.
  • Pension income: You’ll need to show evidence of the amount you get from each pension.

What can I afford to borrow on interest-only?

Mortgage lenders will usually lend at four times an annual salary but whether this is enough to get you an interest-only mortgage depends on the valuation of the property you want to buy. Some lenders will stretch to five times’ annual salary and a few will go to six times in the right circumstances.

The amount they will lend can be illustrated in a table:

Income £ Multiplier Loan Value
£45,000 4 £180,000
£45,000 5 £225,000
£45,000 6 £270,000

This table is for demonstration purposes only.

Interest-only mortgage lending will be capped at the repayment vehicle

Mortgage lenders will also base what they lend on the amount that is covered by the agreed repayment vehicle. Interest-only mortgage affordability will be capped to no higher than the value of your savings, investments or pension lump sum, whichever option you agree will be the repayment method.

If your loan is based on the amount of your repayment vehicle and that is through the sale of an additional property and the equity in that property is £150,000, then the maximum loan would be £150,000 unless the mortgage lender will only lend a percentage of the total amount of equity available, in which case it will be less.

If you want to use the sale of the property you are buying under interest-only mortgage rules then you have to meet the minimum equity levels in that property required by the lender. Some require at least £200,000, others £150,000, and a handful will accept £100,000.

Consider part repayment and part interest-only

Those who have a repayment shortfall and are unable to borrow the full amount they need on interest-only can, with many mortgage lenders, split the loan – taking some on interest-only and the rest on repayment. This can make interest-only mortgages easier to get.

No minimum equity for buy-to-lets

With a buy-to-let property on an interest-only mortgage, some mortgage lenders still require you to have a minimum income, but others will assess what they’ll lend you based on the expected rental income against the repayment amount.

Getting the highest loan for a buy-to-let deal on an interest-only basis can be complicated so give us a call and one of the expert advisors we work with will be able to help for free and with no obligation.

Frequently asked questions

Got a question that we haven’t answered, or interested in finding out more? See our FAQs below.

Can I still get interest-only mortgages if I have a poor credit history?

Your credit history is a vital piece of evidence that mortgage lenders will check before they agree to lend money to you. They want to see if there is a chance you won’t repay the loan and if you have any missed payments, have had arrears or become bankrupt, it could affect whether they’ll lend to you.

However, poor credit history doesn’t have to be a major problem. If you have been rejected by a mortgage lender for an interest-only mortgage due to bad credit, it may be that you’ve applied to a lender or broker who treats customers with a poor credit history with a one-size-fits-all approach.

However, a poor credit history doesn’t necessarily mean you’ll be turned down by all. It simply means to find out is it possible to get a residential interest-only mortgage, you may need to speak to mortgage brokers with expertise in this area.

Similarly, for contractor mortgage, interest-only deals or self-cert interest-only mortgages, there are lenders out there who specialise in these products.

There are lenders who will consider borrowers with a range of credit issues, including:

What if the property has a non-standard construction?

If a property does not have brick or stone walls or a roof made of slate or tiles it is likely to be classed as non-standard.

Examples of non-standard homes include:

  • Timber-framed houses
  • Steel framed houses
  • Cob
  • Timber buildings (such as log cabins)
  • Concrete buildings (Postwar pre-fabs)
  • Thatched cottages
  • Tin roofs
  • Felt Roofs

This can mean it is hard to get an interest-only mortgage and it can mean a lender will not lend to you if you want to buy a home that falls outside of the standard construction.

This is because they can be more difficult to maintain, more expensive to insure and because lenders may consider it harder to recoup their money through a sale because there is less demand for non-standard homes.

However, much of the difficulty in obtaining a residential interest-only free loan for a mortgage for a non-standard home is because lenders lack specialist knowledge and are unfamiliar with the actual risk.

The experts we work with may be able to find lenders who are able to accept borrowers for this type of property. Make an enquiry and we’ll match you with an expert shortly.

Does how much I can borrow on an interest-only mortgage depend on my age?

There are age limits set by lenders for borrowing against an interest-only mortgage.

The good news is that some lenders are increasing the age limits linked to mortgage borrowing, recognising that people are working and living for longer and retiring later. Partly the answer depends on how much deposit you have put down.

Retirement interest-only mortgages (RIO)

Another new trend in mortgage lending over the last few years has been the introduction of retirement interest-only (RIO) mortgages where often there is no (or a high) maximum age set for borrowing because the repayment plan is the sale of the property if there is enough equity in it.

They have some similarities to lifetime mortgages (equity release). The borrower pays monthly mortgage interest and the repayment date is usually when the borrower dies, sells the property or goes into care.

Mortgage lenders will decide on the maximum LTV ratio for a RIO mortgage application. RIO’s increase the borrowing options available for older borrowers after the regulator relaxed rules allowing lenders to offer terms for these products which were previously unavailable.

Retirement mortgages (equity release)

If you are not eligible for a RIO, there are other options available such as a retirement mortgage using equity release. These are usually available to over 55’s. The loan becomes fully paid off when the last person living in the property dies, sells the home or goes into care.

If the property is on a buy-to-let basis then investment income is acceptable to mortgage lenders without a repayment vehicle because the property can be sold at the end of the term.

Can I pay interest-only on my mortgage as a second home?

There are all sorts of reasons that someone would want a second home. It could be for another family member, for a holiday home or to use if you work a long way from your main residence. The government introduced significant increases in Stamp Duty on second homes in April 2016.

If the second home is for a relative to live in it may be classed as a regulated buy-to-let as you don’t intend to live there.

In theory, you could get an interest-only second home mortgage if you meet the mortgage lender’s affordability criteria and the rules on purchasing a second home. Lenders have different policies but as long as you have a repayment plan in place, many lenders will advance at an LTV ratio of 70%, so you’d need a 30% deposit, some will go to 75% LTV and a few will stretch to 80% or higher in the right circumstances.

Although interest-only mortgages on a second property are less common than they used to be, it doesn’t mean you can’t get one, it just means you need to know where to look. The advisors we work with are experts who understand how to apply and who to apply to for these products so speak to one today.

Are interest-only mortgages still available for large loans?

Many mortgage lenders have interest-only mortgage lending criteria that require a high income in the first place, so as long as you meet the eligibility and affordability criteria, then it’s possible, with the right expert help, to find an interest-only mortgage for a large loan.

Some lenders will accept that you have a repayment vehicle to use to repay a large interest-only mortgage if you show them that you plan to downsize at some point in the future and use the equity in the property to repay the loan.

Most lenders will require bigger deposits for an interest-only mortgage for a large loan, which isn’t surprising if you are borrowing large amounts of money.

How to qualify for an interest-only mortgage depends on a number of factors, because all lenders have different criteria, and some will accept a higher LTV ratio than others as long as you can show the loan is affordable and that you have a recognised and reliable repayment vehicle.

What happens at the end of the term if you can't repay the interest-only mortgage?

Interest-only mortgage rules mean you don’t make any capital repayments, so your monthly payment is just paying the interest. This means at the end of the term you should have a repayment vehicle in place to pay off the capital balance.

If, as was the case for many thousands of people with endowment policies, your repayment vehicle has failed to grow to reach the level needed to pay off the original loan, there are options available.

  • Inform the mortgage lender immediately – Communicating with your lender is very important if you don’t have the funds to repay the whole of the loan. Most lenders will want to negotiate a solution.
  • Repossession – If you come to the end of the term and can’t repay and have exhausted all other options then, repossession is a possibility. Mortgage lenders have a legal right to sell the property, with the proceeds used to pay off the balance owed. If there’s a shortfall, the lender may want to be repaid and if they do they must let you know within six years.
  • Mortgage lenders must be flexible – Mortgage lenders want to get their money back and most will be willing to work with you to find a way for the loan to be repaid.
  • Some have in the past just allowed payments to continue – It’s possible and has previously been the case that some mortgage lenders won’t repossess but will allow your interest-only mortgage repayments to simply continue.

If you are unable to repay the loan at the end of an interest-only mortgage, there are options available and our experts will be happy to speak with you and explore the different options open to you to try and find a solution.

Speak to an expert

If you would like to find out more about any of the issues raised in this article, call 0808 189 2301 or make an enquiry.

We’ll match you with one of the whole-of-market mortgage brokers we work with. They will be happy to answer your questions, discuss your options and find the best mortgage deals for your circumstances.

Updated: 12th February 2020
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of 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 info 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.

Find out more about interest only mortgages

Interest Only Mortgages