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Interest-only mortgage

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 06. June 2023

Interested in speaking to mortgage brokers about interest-only mortgages.

  • Are they growing in popularity? Which borrowers could they suit?
  • Rate-wise how do they compare to fixed rate mortgages? 
  • What is lender criteria like for interest-only mortgages? Do you think this may tighten in the near-term?

6 responses from the Newspage community

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Emma Jones
Managing Director at Whenthebanksaysno.co.uk
Interest-only mortgages are a type of mortgage where the borrower only pays the interest on the loan and not the principal. These types of mortgages are not as popular as they once were, however we have seen more clients opt for this at the moment, they may still suit certain borrowers. Interest-only mortgages have commonly being used by borrowers who have a variable income, such as self-employed individuals. They may also be suitable for borrowers who have a large amount of savings or investments that they plan to use to pay off the mortgage at the end of the term.
Interest-only mortgages tend to have lower monthly payments than fixed-rate mortgages, but they come with risks. Borrowers who only pay the interest on the loan do not build equity in their home, and they may end up owing more than the home is worth if property values decline. Additionally, at the end of the term, the borrower will need to pay off the entire principal balance, which can be a significant amount of money.
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Justin Moy
Managing Director at EHF Mortgages
When mortgage payments significantly increase, the Interest Only options become more popular, especially for those with larger mortgages or struggling to cope with those higher rates. Typically those with higher-value properties will look for more flexibility with their mortgage payments through an Interest Only mortgage, as income may be a combination of salary plus regular bonuses, and they will look to downsize in the future, which will fit most lenders' needs. Rates tend to be the same, or slightly more, for an interest-only mortgage, they work really well in an Offset arrangement, allowing clients to use cash savings to reduce monthly payments or pay the mortgage off earlier. Criteria is quite tight already, most lenders have a minimum income of £75k requirement, and around £250-300k of equity in the property before they will look at the case.
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Ashley Thomas
Director at Magni Finance
We have noticed that interest-only mortgages are in higher demand with the increased rates.

Generally, you will need a minimum income of £100,000 per annum with a retail bank and £250,000 with Private banks.

As the monthly payments are much lower on interest only, the wealthy clients tend to reinvest this in other assets such as stocks as they feel it can potentially give them a higher return.

It also allows flexibility of paying a reduced monthly cost and paying ad hoc payments as and when they can. For example, we see this a lot with bankers or partners of law firms when they receive large annual lump sums.

Most retail banks cap at 75% interest only for loans above £1m. However, we have access to private banks that can go up to 90% for HNW clients.

The rates are normally the same with interest only.
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Matthew Jackson
Director at Mint FS
Interest only mortgages have always been popular with certain borrower types - namely HNW Clients or Clients with very low loan to value mortgages or Older Borrowers who are looking to extend their stay in their homes before downsizing.

Undoubtedly there has been more enquiries regarding these - driven by the rising cost of living and upward trend in mortgage rates. However this has coincided with lenders adjusting and tightening criteria for interest only applications meaning less applicants would qualify.

There seems to be a core group of lenders who specialise in these type of applications and will offer a small range of product options - from 2 & 5 Year Fixed Options to more flexible discounted products or tracker.
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Austyn Johnson
Founder at Mortgages For Actors
I/O mortgages are being seen as a flexible option with the ability to pay interest at a lower rate and then to overpay as needed or possible.
Some of the trades we see find this very helpful
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Paul Neal
Mortgages & Equity Release Advisor at First Choice Financial Services
Many people see interest only just as a way of saving on repaymetns but seem not to factor in the risk of not repaying the capital on the mortgage, this year we have seen an increase of clients who are coming to the end of their interest-only mortgage term and are being forced into later life lending to repay them, it's estimated there is going to be 550,000 interest only mortgage coming to an end in the next few years with no way of repaying the debt.