Interest-only mortgages have attracted considerable scrutiny and some negative press in the past few years. As a result, most lenders have tightened their criteria for interest-only mortgages, which are often considered high risk.
This isn’t to say that interest-only mortgages will be an impossibility. However, they will not be available to everyone, and they will only be an option if there is a justified and logical reason for you to have one. In short, if you want an interest-only mortgage, expect the application process to be very thorough. Lenders will be rigorous in their need to understand your motivations for this type of finance, as well as your plans.
If you opt for an interest-only mortgage, you will make interest payments for the first period of the loan. How long this period lasts will depend on the length of your mortgage and how much you borrow. Then, you will need to pay off the principal.
In the past (when this type of mortgage was more prevalent and criteria less strict), borrowers might have sometimes successfully paid off their interest, but have then reached the end of their loan and have been unable to pay off the principal amount. However, this is rarely the case for high-net-worth individuals who usually have income, assets or investments that will support the repayment of the principle, even if it is substantial. High-net-worth borrowers are usually prudent when it comes to forward planning and have the tools and advisors available to them to ensure that generating or saving capital to pay off the principal is a smooth and relatively effortless process. As such, this type of property finance continues to be a very viable and advantageous way of borrowing if you have significant assets or wealth.
Sometimes, your lender will offer you the option to pay off part of the principal during the initial interest-only period. Whether or not you opt to do this will depend on how you plan to exit the loan, your financial situation and how useful this would be to you from a planning perspective.
Interest-only mortgages are common for buy-to-let investors but are not as readily available for residential mortgages because of the risks associated with them. However, if you have the right profile, getting an interest-only mortgage will be possible. Doing so will often be financially beneficial: interest-only mortgages will usually reduce your monthly mortgage repayments by quite some margin compared to other repayment structures.
Lenders will look carefully at affordability, and these mortgages will often come with a lower loan-to-value ratio as lenders look to find comfort in lending. It’s not uncommon for lenders to request assets under management as well. It’s worth noting that an interest-only mortgage will always be out of reach if you can’t afford the monthly payments on a capital and interest mortgage.
If you want an interest-only mortgage, how you present your request will be essential. Lenders will want to see concrete justification for why this is a good option for you beyond it being beneficial in terms of what you’ll pay compared to other types of mortgage. You will need a solid, documented repayment plan and be able to provide your lender with lots of detail around how you plan to pay back the loan.
Many lenders don’t openly publicise they offer interest-only mortgages, and they will only consider granting them on a case-by-case basis. Usually, interest-only lenders will prefer offering this type of finance to individuals with the profile and financial background that can easily take on – and repay – this type of loan. When you consider you may be looking at paying anything from a few hundred thousand pounds or multi-million pounds back in a single lump sum, it’s easy to understand lender rationale. It’s also worth noting that many lenders will require introductions from trusted partners like Enness to consider you for this type of loan. An introduction will add more substantiation to your application because it shows you are supported by an independent and trusted partner that also believes you to be a suitable candidate for an interest-only mortgage.
Secondary property, bonus income, stocks and shares can all be used as leverage for this kind of mortgage. Alternatively, a mixture of interest only and capital and interest financing can also be a good option.
For higher levels of borrowing or finance with a low loan-to-value ratio, interest-only mortgages are still readily available. For high-net-worth individuals with a robust financial profile and the ability to repay the mortgage, this type of mortgage can make a lot of sense – especially from a long-term planning perspective.
Interest-only mortgages remain an important product, especially in London. If you have a certain profile or circumstances which merit an interest-only mortgage, this type of finance can be very advantageous. It’s a particularly viable route if your income is made up of large bonuses or commissions, for example. This finance can also be helpful if you plan to live in the property for a short time before selling it or if you have other assets which will cover your mortgage debt.
First and foremost, Enness will always discuss the advantages and drawbacks of an interest-only mortgage with you. It’s crucial that you understand all your options, what will be most beneficial to you, and if an interest-only mortgage is the best route in your circumstances. Enness will also look at your background and finances to ensure that an interest-only mortgage is an option – not everyone will have the right profile to allow lenders to offer this kind of finance.
Many of Enness’ clients request interest-only mortgages at the outset of conversations with a broker. Enness is experienced in arranging such property financing and will be able to secure the best terms and rates available on the market.
In an interest-only mortgage, you pay the lender the interest on the borrowed amount without making repayments on the principal loan sum. This implies that you have fulfilled the interest obligations to the lender; however, the principal amount remains unpaid and will need to be repaid in the future.
Repayment mortgages represent the most prevalent form of mortgage. Monthly repayments are made to your lender, covering both the capital and interest, spread over the duration of the loan term.
If you are considering an interest-only mortgage or would like to understand more about this type of finance, get in touch. A member of Enness’ team will reach out for an informal chat to talk you through your options, ballpark figures and share more about lenders and the application process.
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