Interest Only - Frequently Asked Mortgage Questions

Interest Only lending has become very difficult, but there are ways in which it has become easier.

See video transcript

Hi guys, Dan and Kye here again from Crescent Mortgages and today we're coming to you with one of our FAMQ's - frequently asked mortgage questions and today's topic will be covering interest-only Mortgages,

Specifically on residential mortgages, before we get started just to remind you that we are Cemap qualified mortgage and protection advisors with a combined 20 years in the industry so I'd say we know what we're doing.

Yeah I hope so.

I certainly do... so let's jump into it.

Take two because Kye was picking his ear. You get it all out mate?

I got it all out yeah.

Good man.

So interest only mortgages, a lot of you will know what they are and actually if you're in your maybe your 40s 50s 60s there's a good chance that maybe you did have an interest-only residential mortgage several years ago, at least a decade ago, and because they were more popular, although actually they didn't work out quite as well as some people hoped, but for those of you that don't know, what is interest-only mortgage?

Not to be confused with interest-free mortgages, an interest-only mortgage is a mortgage where you just pay the interest, you don't actually pay the thing off and at the end of your mortgage term you have to pay off the mortgage with your own means. You're not paying it off each month with your monthly payments.

I guess the alternative, which is the most common in the present day for residential mortgages is capital repayment and most of you with a residential mortgage will have a capital repayment mortgage which means that your monthly payment consists of the interest as well as clearing the capital down, so the payment is bigger than an interest-only mortgage because you're paying interest plus the capital however with a capital repayment mortgage at the end of the term, let's say you've got a 25-year term your mortgage will be fully cleared and your property will be mortgage-free, whereas with an interest-only mortgage at the end of the term because you've just paid the interest you've not cleared the mortgage down so you will still have the mortgage debt at the end of the term which will need to be clear with whichever repayment vehicle you you prepared for it.

Why would somebody take an interest only mortgage? Why would you want a big old mortgage debt left after 25 years?

I guess the reason for taking an interest-only mortgage will pretty much determine whether you should take an interest-only mortgage.

So if you're looking to take an interest-only mortgage, just because you want to keep your mortgage payments down and that's pretty much it, then perhaps it isn't for you, whereas if you're taking an interest-only mortgage because you have a genuine repayment vehicle or repayment strategy that at the end of the term you will use to clear the mortgage in full and you're confident that you will have access to that money and that money has been put aside specifically to clear the mortgage then perhaps an interest any mortgage is for you because it will keep your mortgage payments down in the short term so the additional money that you're not spending on your mortgage could go elsewhere and then at the end of the mortgage you'll obviously be able to clear it with the the repayment vehicle.

Anything I missed?

No I think you got that.

I suppose the main question that most people probably want to know is how? Isn't it? Why would you want one?

If you're watching the video you're probably looking to find out how to get one.

The main point here is that there are limitations.

So now's a good time to mention that finding an interest-only mortgage, again for a residential, buy to let mortgages it's fine, but for a residential mortgage, first of all a lot of lenders won't actually lend on interest only.

They don't like the fact that at the end of the term your mortgage is not going to be cleared and they've got no assurances that you're going to be able to clear it. There are some lenders that will give an interest-only mortgage on a residential property, quite a few will, but you do need to meet the criteria and it really all comes down to the repayment vehicle, so your strategy for how you're going to clear the mortgage at the end of the term.

Now there are a few strategies that do pop up, such as savings, if you've got a significant amount of savings, potentially equity in another property, let's say you've got a buy to let with a huge amount of equity and they're confident that you can sell that buy to let and use the equity to clear the mortgage, possibly a pension pot, although that can be a bit of a tricky one if you started drawing from the pension or if there's not enough in the pension pot at the point of application correct to evidence that the full mortgage will be cleared.

I suppose other ones that people sometimes try to use, but don't seem to work. Inheritance, I hear a lot "I'm not going to pay it off because I've got an elderly relative who I'm going to be left with a significant amount of money", a lender won't use that, which interestingly is is actually probably quite a common reason why someone would take an interest-only mortgage and in reality I guess it makes sense you know if you've got an elderly parent who looks like maybe they don't have more than a couple of years left and you know you're pretty confident that you are going to be receiving a significant inheritance that we understand, there's a reason why maybe you would want an interest-only mortgage, because you know you're going to have the money to clear it and you do want to keep your payments down, but as I mentioned the lender has absolutely no guarantee and lenders are generally very black and white, so they have absolutely no guarantee that the parent is going to die prior to the end of the term, so unfortunately they usually can't use that.

The most common one that people seem to use and after a conversation seems to probably be the strategy is two different things, either called sale of the property or probably better referred to as downsizing. I'd say because often you're buying your four bed detached house with your kids and you know you're buying that big space and when they flow the nest you don't need the extra bedrooms, you don't want the extra bedrooms maybe, and you go from the big expensive house to a smaller house or even a small apartment or whatever it may be.

That's probably the most common strategy which a fair amount of lenders will adopt. The ones that do lend an interest only.

I guess two key points on that, number one, the lenders will need you to have a significant amount of equity in the property so if you've got quite a high loan to value and there's not a huge amount of equity either, as a percentage or as a monetary figure, then generally they won't let you do sale of property, there's just not enough assurance for the lender that you are actually going to be able to clear the mortgage with the sale of the property because they don't know exactly what property prices will do.

£200,000 - £300,000 for a lot of them and often you can't be above around 50% loan to value. Some that varies but 50% is often the cap if you're above that they generally won't give you interest only on anything above it, and the the second point to make is that just because you can get the mortgage on an interest-only basis using sale of the property, you actually have to be comfortable that you, in reality will be willing to move out of the home and downsize at the end of the term. We do come across it quite frequently where people are in their home they've been there for decades, they've said the family's moved on they're really happy they've got no intention to move but unfortunately they have an interest only mortgage which is coming to an end in the next couple of years and they're backed into a corner where they because of their age, they can't really get the size mortgage that they need and actually they have to move out of a home, that they're actually really happy and hope to be there forever home so you need to make sure that you are comfortable with that, unless you come into other money that you would be willing to vacate that property at the end of the term.

I think that's having a strategy, there's not too many more that you'd go into, there's some old-fashioned ones such as endowments which aren't really around anymore but yeah not really worth us going into those.

If you do have one it's still possible, but yeah aren't that relevant.

I enjoyed that one. Yeah, make sure you like and subscribe and as always any questions leave them in the comments or get in touch because as we say every time, everyone's circumstances are different.

You just had a final point to make there?

I was just looking for a banner.

Yeah you can't click on the banner, no it's not clickable, we're not there yet but you should find some information wherever that's popping up.

Have a great day.

Thanks a lot.