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Interest Only Mortgage Criteria

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By Pete Mugleston   Mortgage Advisor

Last updated: 17th December 2018 *

Can you still get interest-only mortgages?

Yes!

Interest-only mortgages are available to borrowers who meet income requirements specified by individual lenders and have a strategy to repay the capital borrowed for the mortgage.

Although less common than they used to be, and considered a riskier proposition than repayment mortgages, interest only mortgages are still available, and the number of interest only mortgage options continues to grow.

We receive many enquiries about the availability of interest-only mortgages every day, and the experts we work with are best placed to successfully find you one, even if you have been turned down previously.

In this article we’ll cover:

Get expert help to find an interest only mortgage

We’re often asked, ‘Are interest only mortgages still available?’ The short answer is yes, and our advisors can help you with specific questions about how to get an interest only mortgage. If you would like to know more call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

What is an interest only mortgage?

Interest-only mortgages are designed so the borrower only pays the mortgage interest each month. The capital borrowed is not paid back, so at the end of the mortgage term you still owe the money.

The idea is that the borrower finds a different way of raising the money to repay the mortgage during the term. This can be via - ISA savings, selling another property, an inheritance and a number of different vehicles, or, in the case of a buy to let mortgage, using no repayment method at all.

How to get an interest only mortgage

If you want to know whether you can still get an interest-only mortgage, the specialists we work with are here to help.

In answering the question, can I get an interest only mortgage?, the simple answer is yes you can, provided you meet certain eligibility criteria.

At the highest level:

  • To get one you must be able to prove your annual earnings or for joint applications, combined annual income, is enough to afford the mortgage you want to borrow.
  • You also need to raise the required deposit and show the 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.
  • You also need to have an acceptable repayment vehicle

What are the eligibility criteria for an interest only mortgage?

Although the eligibility criteria for interest only mortgages have tightened, many people are still able to get one - they must meet all the usual interest-only mortgage requirements, as well as be able to show that they have an acceptable repayment vehicle in place.

What are the acceptable interest only mortgage repayment strategies?

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

Some lenders may be happy to accept one type of repayment strategy but not another, so to check the interest-only mortgage qualification, you should talk to one of the advisors we work with who are dedicated to overcoming obstacles and specialists in niche areas which means they may be able to help you where mainstream lenders have been unable to.

In general lenders 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 interest only mortgage 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 lenders don’t accept this strategy, of those that do, some require £200,000 equity, a few £150,000, and one or two accepting £100,000.
  • Sale of another property – This means you will sell another property and use the equity towards repaying the loan on the interest-only mortgage
  • Savings – You will use savings to repay the loan at the end of the term. Lending cannot exceed total savings.
  • ISA – You will use ISA savings or investments to repay the loan on the interest only mortgage
  • Bonds/investments – You will use bonds or investments as a repayment vehicle. The lender will want to see evidence of their value and projected growth
  • Pension lump sum – You will put a pension lump sum towards repaying the loan. This is a 25% tax free lump sum from your pension pot
  • 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 mortgage term. They are still an option but you must convince lenders that they will grow as projected to repay the loan. Usually you will need confirmation of the projection from the endowment company in the last 12 months.
  • 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.
  • Other assets – Certain lenders will accept other assets as repayment vehicles if you can show that they will cover the loan at the end of the mortgage term.

We are regularly asked do banks still offer interest only mortgages and the answer is yes, they do.

How much can I borrow against my interest only repayment strategy?

In general lenders will only let you borrow based on the current or projected value of the repayment vehicle you have chosen, though some lenders will accept a combination of more than one repayment vehicle for the same mortgage.

Is there a minimum value for my repayment strategy?

Some 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. This means the borrower can use the proceeds of the rent to keep or to gradually repay the mortgage.

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 lenders this can exceed their maximum age limits. Thankfully, there are a number of lenders willing to lend into retirement, and a handful even have no maximum age restrictions.

How much can I borrow on an interest only mortgage?

What deposit do I need for an interest only mortgage?

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 property 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 also, whether you’re borrowing on repayment or interest only.

The good news is that there are more mortgages available for higher LTV ratios than there were immediately after the credit crunch, and more lenders are offering interest-only mortgages, but lenders have to follow tighter lending eligibility criteria following new lending rules introduced after the Mortgage Market Review (MMR) in 2016, so conditions for interest-only mortgage agreements are stricter.

So 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 market, which means that can match you with the best possible deals available and the lowest deposit interest-only mortgage products.

Is there a minimum income for an interest only mortgage?

Most mainstream lenders offer interest only mortgages with no minimum income requirements, but will ask you to complete an affordability calculator to ensure the mortgage is affordable.

Some 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 does have minimum income requirements it will usually be a minimum of £50,000 for an individual or £75,000 for a joint application, although all lenders are different and have different policies for different types of income, and not all require a minimum income for interest only mortgages.

What income do I need for an interest only mortgage?

Accepted income types are as follows, but policies on each vary between lenders:

  • Fixed Income (wage/salary) – This covers most people on a fixed annual income and almost all lenders 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 shows, there are lots of options, even if you only have one years’ accounts.
  • Part time – Your borrowing limit will be based on your part-time earnings and any other income.
  • Temp workers – Temporary workers can still use form P60 as evidence of annual income even of 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?

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 value 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

Interest only mortgage lending will be capped at the repayment vehicle

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 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 £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 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 ley property on an interest only mortgage, some 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 mortgage repayment amount.

Getting the highest loan for a buy to let mortgage 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.

Get the right advice

Call Online Mortgage Advisor today on 0800 304 7880 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 change a fee and there’s no obligation or marks on your credit rating.

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

Your credit history is a vital piece of evidence 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 mortgage arrears or become bankrupt, it could affect whether they’ll lend to you.

However, a poor credit history doesn’t have to be a major problem. If you have been rejected by a 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. We receive enquiries asking is it easier to get an interest-only mortgage if I repair my credit file and the answer is, yes it is.

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 an interest only mortgage, you may need to speak to an expert who deals in that area regularly and who knows lenders who accept borrowers with adverse credit issues. Similarly for contractor mortgage interest only deals or self-cert interest only mortgages, there are lenders out there who specialise in these types of mortgages

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

  • Interest only mortgages with Low credit score
  • Interest only mortgages with Mortgage Arrears
  • Interest only mortgages with Late payments
  • Interest only mortgages with Defaults
  • Interest only mortgages with County Court Judgements (CCJs)
  • Interest only mortgages with Individual Voluntary Arrangements (IVAs)
  • Interest only mortgages with Debt Management Plans (DMPs)
  • Interest only mortgages after Bankruptcy
  • Interest only mortgages after a Repossession

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 (log cabins etc)
  • Concrete buildings (Post war 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 an interest 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.

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 for an interest only mortgage 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 vehicle 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.

Lenders will decide on the maximum LTV ratio for a RIO application. RIO’s increase the borrowing options available for older borrowers after the regulator relaxed rules allowing lenders to offer terms for these types of mortgages not previously available.

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 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 as long as you meet the lenders affordability criteria and the rules on purchasing a second home. Lenders have different policies but as long as you have a repayment vehicle 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 type of mortgages so speak to one today.

Are interest only mortgages still available for large loans?

We receive regular enquiries asking can you get interest only mortgages on large loans and it is certainly possible.

Many 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 are the options when you reach the end of the term on an interest only mortgage?

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 lender to extend the term – Depending on your circumstances, 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 lender who has different rules on the length of the mortgage term and the age you can have an interest only mortgage for
  • Remortgage and switch to repayment – If you meet the eligibility requirements you could switch your interest only mortgage to a repayment mortgage.
  • 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
  • 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 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 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.
  • If you come to the end of the term and can’t repay and have exhausted all other options then ultimately, repossession is a possibility. Repossession is when the lender takes back your property. They have a legal right to sell the property for the best price that can be obtained. The proceeds will be used to pay off the balance owed to the lender and any surplus funds will go to you. If there is a shortfall the lender may want to be repaid and if they do they must let you know within six years.
  • Lenders must be flexible – 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 is possible and has previously been the case that some 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 to you and explore the different options open to you to try and find a solution.

Speak to an expert interest only mortgage advisor today

If you would like to find out more about any of the issues raised in this article call Online Mortgage Advisor today on 0800 304 7880 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 change a fee and there’s no obligation or marks on your credit rating.

Updated: 17th December 2018
OnlineMortgageAdvisor 2019 ©

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.

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