Is interest only still an option for house purchase in the UK?

Interest-only mortgages have been a subject of debate and discussion in UK Housing Finance for quite some time. In the wake of stricter regulations and increased awareness of responsible lending, these mortgages have become less prevalent, but they are not entirely extinct. In this article, we will explore the current availability of interest-only mortgages in the UK, their appropriateness in various scenarios, and the criteria lenders typically expect borrowers to meet to qualify for their use.

The Evolution of Interest-Only Mortgages

Interest-only mortgages were once a popular choice among homebuyers in the UK. These mortgages allowed borrowers to pay only the interest portion of their loan for a specified period, usually planning to do so in the early years, before transitioning to a repayment mortgage, where they would start paying off the principal. This structure made homeownership more affordable for many in the short term, but it also carried the risk of leaving borrowers with a substantial debt at the end of the interest-only period Especially as some found it very hard to wean themselves off the low cost interest only option.

In the aftermath of the global financial crisis of 2008, which was partially attributed to irresponsible lending practices, the Financial Conduct Authority (FCA) introduced stricter regulations for mortgages, including interest-only mortgages. Lenders were required to ensure that borrowers had a credible and viable repayment strategy in place, effectively making it harder to qualify for such mortgages.

The Current Availability of Interest-Only Mortgages

Interest-only mortgages still exist in the UK, but they are far less common than they once were. Lenders now apply more stringent criteria when considering applicants for these loans, and borrowers are required to provide a clear plan for repaying the principal amount borrowed. This typically involves demonstrating how they will repay the mortgage by the end of the term, whether it's through savings, investments, or other means.

Interest-only mortgages are primarily available through high-street banks, building societies, and specialist lenders, although the options may be limited. It's important to note that not all lenders offer interest-only mortgages, and those who do have varying eligibility criteria. Borrowers must meet specific qualifications and prove that they can comfortably manage the loan.

When Are Interest-Only Mortgages Appropriate?

1. Interest-only mortgages can still be appropriate for certain homebuyers and homeowners, but it's crucial to understand when and how to use them. Here are some situations where interest-only mortgages may be a suitable choice:
2. Short-Term Cash Flow Management: Interest-only mortgages can be helpful for individuals who expect a short-term reduction in their income but anticipate a financial recovery in the future. For example, someone taking a career break or starting a business might benefit from lower monthly payments initially.
3. Investment Opportunities: Some borrowers may opt for an interest-only mortgage to free up cash for investment purposes, such as purchasing another property, investing in stocks and bonds, or starting a business. This strategy can potentially yield higher returns if the investments perform well.
4. Property Development/Buy to Let: Property developers/investors often use interest-only mortgages to fund their projects/portfolio’s. They plan to sell the property for a profit before the interest-only period ends, allowing them to cover the repayment or in the case of Buy to Let, look for capital growth and income to reap their return.
5. Downsizing: Homeowners nearing retirement may consider downsizing to a smaller property. An interest-only mortgage could be suitable in such cases, as they can comfortably cover the interest payments while using the sale proceeds of their current home to repay the loan.
6. Irregular Income: Borrowers with irregular income, such as freelancers or the self-employed, might prefer interest-only mortgages to manage their cash flow more effectively, making larger capital payments when their income allows.

Lender Criteria for Interest-Only Mortgages

To qualify for an interest-only mortgage in the UK, borrowers must meet certain criteria. Lenders have become more stringent in their assessments, aiming to minimize the risk of borrowers being unable to repay the loan. The key criteria typically include:

1. Robust Repayment Plan: Lenders will assess the borrower's repayment strategy for the end of the interest-only period. This may involve using savings, investments, other assets, or a combination of these. Lenders expect a well-thought-out and credible plan.
2. Loan-to-Value (LTV) Ratio: Lenders may have restrictions on the maximum LTV ratio for interest-only mortgages. A lower LTV ratio signifies a larger deposit, which can make the application more favourable.
3. Affordability Assessment: Borrowers must demonstrate that they can afford the monthly interest payments. Lenders assess income, regular expenses, and potential changes in financial circumstances.
4. Age Restrictions: Some lenders may have age restrictions on interest-only mortgages. Borrowers must be able to repay the mortgage by a specific age, often in line with their expected retirement age.
5. Minimum Income Threshold: Lenders may have a minimum income requirement to ensure borrowers have sufficient financial capacity to support the interest payments and future repayment of the principal.
6. Creditworthiness: As with any mortgage, a good credit history is essential. Lenders will assess the borrower's credit score and financial history to determine eligibility.

Interest-only mortgages still exist in the UK, but they are no longer as widespread as they once were. To qualify for these mortgages, borrowers must meet stringent criteria and provide a solid repayment plan. Interest-only mortgages can be appropriate in specific situations, such as managing short-term cash flow, seizing investment opportunities, or facilitating property development or Buy to Let. However, they come with risks, and borrowers should fully understand the commitment and ensure they have a viable strategy for repaying the principal at the end of the interest-only period. It would be a very good idea to seek professional financial advice from an expert from Capital Private Finance before committing to an interest-only mortgage to make an informed decision that suits your individual circumstances.

 

Get expert mortgage and protection advice tailored to you

The experts at Capital Private Finance have access to a vast array of mortgage products and can access a range of specialist products not available to all brokers. This means that if it is possible to arrange finance, then we should be able to help you achieve your goals.

Contact Capital Private Finance

ALL MORTGAGES ARE SUBJECT TO STATUS AND LENDER CRITERIA. MORTGAGE PRODUCTS CAN BE WITHDRAWN AT ANY TIME.

A FEE WILL BE PAYABLE FOR ARRANGING YOUR MORTGAGE. YOUR CONSULTANT WILL CONFIRM THE AMOUNT BEFORE YOU CHOOSE TO PROCEED.

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU RE-MORTGAGE.

Mortgages available through Capital Private Finance. Capital Private Finance is an Appointed Representative of Mortgage Intelligence which is authorised and regulated by the Financial Conduct Authority under number 305330 in respect of mortgage, insurance and consumer credit mediation activities only. Registered Office: Greenwood House, 1st Floor, 91-99 New London Road, Chelmsford, Essex, CM2 0PP. Registered in England & Wales under number 07552028.