Perhaps the most pertinent question in this area is can I even get an interest only mortgage? The short answer is yes.
A legacy of the financial crash in 2007 was the almost universal withdrawal of all interest only lending. To stay afloat banks determined the best approach for them was to shy away from their “riskier” lending in order to shore up their balance sheet. For the same reason you may also remember high loan to value (LTV) mortgages were hard to come by. But I’ll talk more about the changing landscape in this sector of the market in my next post.
I should first say this article relates to interest only being used for mortgages against your home. Buy to let lenders will offer interest only as standard up to 75% and with the right broker 85% LTV can be sourced with no need to provide any repayment vehicle beyond the sale of the property the debt is secured against.
How do I get an interest only mortgage? Some examples:
There are two types of interest only lending against your home:
Pure interest only
This is self-explanatory to a certain extent, with some lenders requiring no repayment vehicle other than eventually selling the property itself. A good broker will be able to source this type of loan quickly and achieve approval with minimal fuss. The only constraint with this type of borrowing is the maximum LTV will be around 50% on the high street. However, if you’re looking to borrow above this, the balance could be placed on a capital repayment basis.
Capital repayment, as I’m sure you know, is when the full balance of the loan is cleared through the life of the mortgage, just through making the monthly payments. This gives the lender reassurance some of the mortgage is automatically repaid each month and the portion above 50% LTV is guaranteed to be cleared by the end of the mortgage. It balances the risk for them. This option enables you to complete the purchase or remortgage to the level you need while still utilising the interest only facility.
Here is a worked example, assuming a property value of £1,000,000.
£500,000 (interest only) + £250,000 (capital repayment) = £750,000 total borrowing
Private Banks can be a little more flexible and look “case by case” for pure interest only. For those with net income of £300,000 or a net worth of over £3,000,000 this can be an advantageous route compared with the more formulaic tick box criteria of the high street. These banks only go through carefully vetted and highly experienced brokers so if you would like to hear more about this less publicised sector of the market I’d be delighted to receive an email from you at firstname.lastname@example.org.
Interest only with a repayment vehicle
This is the more commonly known and available method of accessing interest only finance. To get an interest only mortgage with a repayment vehicle, the borrower is required to evidence they have a “credible” alternative to repaying the loan. I have deliberately annotated the word credible because this has different meanings for each lender.
The commonly used list of credible alternatives includes: equity in a second property, pension funds, managed investments, and for those who still have them, endowment polices.
However, within each of those categories there is a big variance in the value that can be used to support your application to get an interest only mortgage.
To list just a couple of examples, some lenders are happy to use the full value of your pension fund (rightly so given the recent change in legislation allowing removing the 25% cash lump sum cap, others will only use that 25% cap figure because policy has not yet caught up with the change in legislation or because they feel ‘most’ people will splash out on cruises, cars or the grandchildren’s education – others are being more conservative still.
Some are happy to take the full value of any equity in a second property, others will restrict this at 80% or perhaps lower.
A good broker with a strong and comprehensive knowledge of the market is vital when it comes to how to get an interest only mortgage for their clients. In short, a good broker can be the difference between getting the loan on the terms you want and getting the loan on terms that don’t agree with you at all… Or, in worst case scenario, perhaps not even getting the loan at all.
This is because interest only often suits borrowers who receive significant annual bonuses or for those who have a large part of their income made up from commission and/or other discretionary income. Your broker will need to extract the maximum value from your bonus income. Just like the use and value of repayment vehicles, lenders’ policies on bonus income varies dramatically. Some will use the full amount, some an average of the last 3 years, some just 25% and others just 50%.
Different lenders also have contrasting views on deferred bonus payments and bonus issued as stock. Your broker should take the time to understand your income in full. When considering how to get an interest only mortgage these finite details can make all the difference. If attention is taken to detail, you will end up with interest only finance where you control the repayment schedule and not have the repayment schedule controlling you!
How do I get an interest only mortgage? The answer might seem cheesy but speak to Enness Private Clients and your chances will be vastly improved.