When interest-only mortgages make perfect sense

When finding a mortgage product that works for you, an interest-only mortgage often represents a raw deal for most first-time buyers and home movers. When compared to a fixed rate, standard variable, discount variable and tracker products, an interest-only mortgage offers more cons than pros with zero contribution to the actual debt of the property purchase leaving a hefty balance to pay to make the home your own at the end of the term.

There are however some instances where interest-only mortgages are the better option. In this blog post, we take a closer look at when interest-only mortgages make perfect sense for certain types of buyers and when to explore other options.

First-time buyers

Buying your own home is costlier than ever. As well as having to foot the bill for a house deposit and other moving fees, you’ll have decades of monthly mortgage repayments to find the funds for. The cost of the latter has seen some first-time buyers turn to interest-only mortgages.

As you’re only paying off the interest of your property purchase, not the debt of the purchase itself, the monthly repayments of an interest-only mortgage are much, much lower. This can make owning a property more affordable in the short term.

For first-time buyers, interest-only mortgages offer another route into the market. In an ideal world, the funds earned from the sale of a property in positive equity will provide the money to cover the initial purchase and offer the profit to pay for a deposit on your next property.

It is important to note however that residential interest-only mortgages have very strict and fairly onerous criteria, with buyers with higher incomes or larger deposits finding the best success. Many residential interest-only products set minimum income levels, minimum levels of equity (which are sometimes a minimum of £300,000) and a minimum 30% deposit, conditions which cannot be met by a large proportion of first-time buyers.

Home movers

It’s not just first-time buyers that interest-only mortgages can work for. Buyers looking to sell their existing property and purchase a bigger, better home can benefit from interest-only deals, especially in today’s market.

Buying your next property with an interest-only mortgage in tow can help you secure the affordable mortgage repayments you need in the short term. You can then switch your interest-only product for a capital repayment mortgage later.

Home movers face the same strict criteria as first-time buyers when applying for most interest-only mortgage products. As home movers are generally much further down the line than first-time purchasers, however, they are often in better positions to fulfil such conditions

Older purchasers

50-year terms are the latest product to sweep the mortgage market, and whilst these mortgage types are providing a much-needed boost for home ownership in the UK, they’re making life difficult for buyers and movers looking to finance purchases later in life.

Finding a deal as an older property purchaser isn’t easy, but a retirement interest-only (RIO) mortgage may provide the answer as Ideal Home explains:

“As you get older, it can prove tougher to get a standard mortgage. With some lenders insisting that the entire mortgage is paid off by the time you reach retirement… With a RIO mortgage, as with a regular interest-only mortgage, you make monthly payments which cover the interest being charged on the sum you have borrowed. Usually the capital is repaid when you sell the property, move into residential care, or die.”

Buy-to-let landlords

Whilst the criteria are strict for residential property buyers and movers looking to apply for interest-only products, interest-only mortgages are the standard for landlords. In fact, the vast majority of buy-to-let mortgages are delivered on an interest-only basis, with the repayments covered by the rent tenants pay from month to month.

Interest-only mortgages keep your overheads to a minimum as a buy-to-let landlord, meaning you can grow your portfolio as you see fit.

For further information on your residential and buy-to-let interest-only mortgage options, please get in touch with our experts today.

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