With an interest only residential mortgage, you only pay the interest due on the amount you borrowed each month and repay the capital at the end of the mortgage term. There are different permutations where interest-only mortgages are concerned. For instance, if you opt for an interest-only mortgage on the basis the sale of the property acts as a repayment method, then there are usually exceptional circumstances such as low loan-to-value (LTV), substantial equity, high-income multiples, or buy-to-let depending on the lender.
The total amount you can borrow will typically be a multiple of how much you earn. But getting an interest only residential mortgage can depend on many factors, not just earnings. These can include the property’s price, how much you want to borrow, your circumstances, and the lender’s criteria.
That said, if you are considering an interest only residential mortgage, there are several things to consider and plan for. First, an interest only mortgage allows borrowers to pay only the interest portion of their monthly loan payments.
This can make a sizable difference in your monthly budget. First, however, it’s essential to understand that interest only loans have certain risks and pitfalls to consider when deciding.
This guide will discuss the advantages and disadvantages of interest only residential mortgages so you can make an informed decision when planning your finances.
Can I make a joint application for an interest only residential mortgage?
Yes, but you may need a higher joint income to qualify than applying alone if the sole applicant’s salary is not substantial. However, it might be easier to reach that threshold if you and your partner earn a certain amount, as this is based on the lender income threshold criteria.
Can I get an interest only mortgage with bad credit?
Yes, you can get an interest-only mortgage with adverse credit. However, it is recommended that you should consult a mortgage broker to help you source a lender that will.
Calculating the cost of an interest only residential mortgage
The interest rate of an interest-only mortgage is generally lower than the interest rate for a repayment mortgage. This can result in considerable savings each month on your mortgage payments.
However, it would be best to remember that interest rates are not fixed and will increase or decrease depending on economic factors or market conditions. Therefore, calculating the cost over time is essential to ensure you are not overpaying interest on your loan.
Benefits of an interest only residential mortgage
An interest-only mortgage offers several advantages for borrowers. These benefits include:
- Lower monthly payments: As mentioned, interest-only mortgages typically have lower interest rates than traditional loans. This allows you to reduce monthly payments and free up more of your monthly budget.
- Flexibility: An interest-only loan also offers more flexibility than a traditional loan, as you are not required to pay off the principal amount of the loan. You can also make additional payments when you have extra funds available.
- Potential for Higher Investment Returns: Borrowers can realise higher investment returns over time by keeping more cash available.
- Improved Cash Flow: Homeowners have more cash available since their payments are lower than a traditional mortgage.
While there are some notable advantages to an interest-only mortgage compared to a capital repayment mortgage, the disadvantages should not be overlooked.
These include:
- More interest paid Long-term: With an interest-only mortgage, you typically pay more than a repayment mortgage. This is because the principal amount you pay interest stays the same throughout the term.
- Payments without reducing the balance: Every month, you only make payments to cover the interest, meaning you will still owe the total balance at the end of your payment term.
- Term shortfall: If your repayment plan falls short, you may be forced to sell the house, secure another mortgage or face repossession after your term.
Should I get advice about interest only residential mortgages?
How a lender accesses your interest-only application depends on different factors; it can also be assessed differently depending on the individual lender’s criteria. We urge you to seek mortgage advice to ensure that you make the best decisions regarding the repayment of your interest-only mortgage. You should only seek advice from a mortgage broker with authorisation from the Financial Conduct Authority (FCA).
Strategies to manage interest and repayment risk
When considering interest only residential mortgages, taking steps to manage interest and repayment risks is essential. Once the lender has approved your mortgage application, you must check that your strategy to repay the amount borrowed at the end of the mortgage term is still right for you. By planning and managing interest and repayment risks, you can ensure that your interest-only loan is a wise decision for your finances.
What repayment plans are available to repay the mortgage?
If you want to be eligible for an interest-only mortgage, then it’s essential that your lender understands and approves the repayment plan you have in place. In addition, your payments will need to pass their affordability criteria if they will accept them as part of payment towards the capital loan.
You could build up enough funds to repay the capital loan with the following options:
- Cash saved in a savings account or ISA
- Stocks and shares ISA
- Pensions
- Investment bonds
- Other properties or assets.
This is subject to the lender’s criteria, as it may only be acceptable to some lenders. Beware that if you’re relying on an inheritance or bonus to pay off your mortgage, it’s not a sensible decision. Your lender may periodically evaluate whether your repayment plan is in effect; for instance, utilising your savings before the mortgage has been finalised could turn out disastrously.
Final thought
Interest only residential mortgages can significantly reduce monthly payments and improve cash flow. However, it is crucial to understand the risks and potential pitfalls associated with interest-only loans before making your decision. You can make an informed decision when planning your finances by carefully considering all the factors involved.
For more information on interest only residential mortgages and to get started with your loan application process, contact a mortgage adviser today. They will be able to provide you with the resources and advice necessary for a successful interest only residential mortgage. With their help, you can make the best decision for your financial future.
