Interest-Only Mortgages

What’s the difference between interest only and repayment mortgages?

Repayment is the traditional mortgage. That’s what more people are used to, where every month you pay some of the interest and some of the capital of the loan. Typically a mortgage might be over 20, 30, even 40 years. You make all your payments, and at the end, the mortgage is paid off in full.

A repayment mortgage is our default recommendation because it’s less risky and saves you on interest. But if there’s a good reason for doing interest only, we can – and also you can mix the two, which I’ll come on to in a moment.

How much do I need to earn for an interest only mortgage?

As always, there’s no straightforward answer in mortgages, but if you earn £75,000 individually or you have a household income of more than £100,000, the majority of lenders will play ball.

The logic is that if you’re more affluent, you have more ways of repaying the loan. However, some banks have no minimum whatsoever – and some banks have higher ones.

What are the terms for an interest only mortgage?

If you mean terms as in the interest rate charged, that is pretty much the same as any mortgage. The structure of a mortgage is either interest only or repayment, and the interest rate normally sits aside that. If you can tick the criteria boxes, you get the same rate as advertised by the lenders.

The other definition of ‘term’ is how long the mortgage is. The maximum term for interest only tends to be 25 years – very few banks offer longer than that. Many banks require the loan to be paid off by the age of 65 or 70. Beyond that is a whole separate type of lending which again I’ll come on to later.

Are Buy to Let interest only mortgages available?

Yes and in fact with Buy to Let that’s the default. The property is seen as an asset itself, so the regulator is less concerned because it’s not your home. You can sell it to repay the mortgage.

Most landlords do set the mortgage up that way. If you want to know how loans are assessed, see the Buy to Let podcasts on our website. In brief, there’s a calculation for how much a bank will lend you, and it’s all to do with the monthly interest charge. It’s called an ICR – an interest cover ratio – and that is much easier to achieve on an interest only basis.

Are interest only mortgages available for the self-employed?

Yes. As long as a bank is willing to offer you the loan and you’ve got the right income and deposit, there’s no differentiation for the self-employed. There are a couple of niche providers that offer self-employed mortgages, but some high street banks are really good at this anyway.

You could argue that they’re more suitable for the self-employed as your income fluctuates. Some months it’s a bit easier to pay more. Plus, some people have what’s called a ‘liquidity event’ – you might sell your business, for example, and that could be a great way of paying off the mortgage.

Can a First Time Buyer get an interest only mortgage?

Yes, as long as you tick those boxes. There’s no differentiation for a First Time Buyer. It’s all about income, deposit and repayment method.

Can I make a joint application for an interest only mortgage?

Yes. But the thing I would point out is that both of you need to meet the criteria. It’s really important to understand how banks determine income and this does come up quite a lot.

Say, for example, a bank says you need £100,000 income for an interest only mortgage. You earn £50,000 basic and a £50,000 bonus. They might only accept half of the variable income and assess you at £75,000 – even though your P60 might state £100,000.

So you’ll need to be careful on joint applications to make sure you both tick the boxes. But that’s exactly why we’re here, so you don’t have to worry about that.

Can I get an interest only mortgage with bad credit?

Perversely, banks are actually more amenable on this. If you’ve had bad credit in the past, you tend to get charged a higher interest rate. If it’s not a major thing, or it was a few years ago, you can soon go back to the high street lenders and get a lower rate.

For the first couple of years, where you’re paying a higher rate it could make sense to go interest only to keep the payments down, then move to repayment at a later date.

There is fluidity around this. Just because you start on one route doesn’t mean you have to finish that way. You could start repayment, then go interest only – and you can mix the two as well.

What are the pros and cons of an interest only mortgage?

The main pro is that it’s cheaper. The monthly payments will be lower because you’re just paying interest. That flips into the direct con that you’re not paying the loan off – so it is more risky.

You have to have a viable repayment method. A lot of banks have strict criteria here, that you need to have assets, shares, a pension, a property or income at a certain level. There are lots of different ways you can repay a mortgage, but you need to show you have a viable repayment method. You need to state what you will do over the next 10, 15 or 20 years to raise that money. We need to evidence that it’s suitable and low risk.

Another pro is that there’s fluidity around it. It could be suitable to do now and we can always change it later.

How long can you stay on an interest only mortgage?

The maximum term tends to be 25 years from the outset of the mortgage. The age limit is typically up to 65, sometimes 70. If you’re young and start out on this route, technically you can have longer. You could remortgage a few times beyond 25 years. But once you start butting up against retirement ages, the rules change.

Can you extend the term of an interest only mortgage?

We just touched on the fact that you can extend by remortgaging. It’s really about your retirement age and how long you can work for.

If you’re a bricklayer, you’re probably not going to be paying a mortgage in your 70s doing this job. But I have a client who is a psychotherapist from Austria who is working at this age – so it really depends what you do for a living.