Interest Only Mortgages Explained
Given the current difficulties in getting an interest only mortgage due to the lenders stance on this type of deal in the last few months and due to high property prices, pay freezes etc, interest only residential mortgages have become increasingly popular as a means of getting off the renter’s market and into property ownership.
However this is easier said than done as most residential mortgage lenders have strict rules on their lending criteria as to when they will allow an interest only mortgage. Some lenders will not offer interest only mortgages on a residential property, some will offer interest only mortgage deals up to a limited loan to value – for example to a maximum of 60% and others will ensure that you have an adequate repayment vehicle in place (such as an Endowment, pension plan, other investment properties etc).
Please note that Buy to let interest only mortgages are not affected by the recent change in lenders perception of interest only mortgages. The changes mentioned in this article relate to the residential mortgage market.
What is an Interest Only Mortgage?
As its name suggests, an interest only mortgage means you only repay the interest rate attached to your mortgage, not the actual loan itself. While this may seem just the same as spending “dead money” on renting a property, the difference with an interest only mortgage is that the rate is often much more reasonable than renting. Plus, you can secure the property where you want to live, make the interest only mortgage payments initially, then choose to clear some of the loan’s capital later on if your financial position permits it.
In addition, the property which you own could rise in value, giving you a profit when you come to sell it. The flexibility of interest only mortgage rates mean that they are also a popular choice for landlords who rent out multiple properties who would prefer not to sink too much investment into capital repayments. If they can secure a rate of monthly rent from the tenants that are greater than the interest only mortgage rates, then the investment will pay for itself.
The risk factor to bear in mind with a mortgage that has interest only repayments is that the value of the property is not guaranteed to increase, but could fall instead. If this happens, the owner may have difficulty repaying the full balance of the loan. Lenders may require you to have a higher percentage of equity in the property before they agree to an interest only mortgage. With every lender having different criteria on their interest only lending policy it is worthwhile to check with The Mortgage Broker for the availability of such deals.
Switching to an Interest Only Mortgage
We can help you find the right interest only mortgages in the UK through our extensive expertise and understanding of the current economic climate. If you’re considering switching your mortgage, then contact us for completely objective interest only mortgage advice and let us help find the most suitable product available for you.
Buy to let mortgages are not regulated by the Financial Services Authority.
