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Mortgage Rates for Interest-Only Borrowing

Do you know what rates you might expect to pay on an interest-only mortgage and how that might compare to a repayment loan? Here we discover the average rates and the factors that will make the biggest impact.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2024-06-14
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Mortgage Rates for Interest-Only Borrowing

One of the critical challenges in interest-only borrowing is to work out which lenders offer the best rates, and how to achieve favourable terms on your mortgage.

Revolution Brokers has compiled this guide to explain how eligibility works and how to select a lender who is best positioned to offer you competitive interest rates.

For independent advice around your interest-only mortgage application, contact Revolution Brokers on 0330 304 3040, or email at [email protected] to arrange a good time to talk.

How Can I Achieve Favourable Loan to Value Ratios on an Interest-Only Mortgage?

Lenders will always need to consider the value of your property, what deposit you have available, the length of the term and any equity held.

Some providers also set caps on Loan to Value ratios, which might affect the right lender to apply to for your lending requirements.

The optimal way to secure the LTV you need is to consult an experienced broker who can work through your circumstances, and recommend lenders whose eligibility criteria you meet.

AboutAbout your mortgage
Single or joint mortgage?
What’s your yearly income?

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about your mortgage

Based on your yearly income,
you may be able to borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

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How Can I Compare Rates on Interest-Only Mortgages?

Sometimes, it is impossible to compare mortgage products, with different rates, fees, terms and products using contrasting terminology.

In this situation, give us a call and let us know what deposit you have, and what rates you are considering, or have been quoted.

The mortgage brokers team can provide help with understanding monthly costs and total repayment values to compare products against each other.

How Can I Get the Best Rates on my Interest-Only Mortgage Application?

Every UK mortgage provider works on a risk analysis basis, so if you present a low-risk application, you will also secure the lowest interest rates available.

One factor is to offer a reasonable deposit. Many lenders have a 25% deposit minimum on interest-only lending, but the higher the value, the lower-risk the mortgage.

Lenders will also look at multiple other factors to draw up a risk profile such as your income, credit report, age and other circumstances.

How Do Interest Costs Change over Different Interest-Only Mortgage Products?

There are multiple interest-only mortgages, and the rates will vary across these:

  • Interest-Only Adjustable Mortgages

This product means that you have more flexibility over your monthly payments. As usual, you repay the interest each month and need to pay back the original loan value at the end of the term.

However, this can be over a short-term period, say for two years, and you can change your repayments as your circumstances allow.

  • Fixed-Rate Interest-Only Loans

With a fixed-rate loan, you will pay back the same interest rate for the duration of the fixed-interest period, which means you have the assurance of a stable payment value.

If interest rates change, your payments will not - which can be positive or negative depending on the fixed-rate, and the movement in the base rate.

  • Buy to Let Interest-Only Loans

BTL mortgages are usually interest-only, and lenders will look at the projected rental income to assess affordability. The risk factor is if the property becomes vacant, or the tenant falls behind with the rent, as the mortgage will remain payable.

What Eligibility Criteria Dictate the Rates I Will Be Offered on an Interest-Only Mortgage?

The closer you meet lenders’ eligibility requirements, the lower the rates you are likely to be offered.

Criteria include:

  • Your income - many lenders will stipulate a minimum income threshold to ensure you can afford the loan. Some providers don’t set a minimum but will want evidence supporting the value of your repayment strategy.
  • What calculation method the lender uses. Some will multiply your annual income by 4.5 times to arrange at a lending cap, whereas specialist lenders may use a more generous multiple depending on the circumstances.
  • Your age can be a factor, with some lenders setting a limit of 70 or 75 on new applicants. Others have no cap or may offer retirement or lifetime mortgages as an alternative interest-only borrowing product.
  • Credit ratings are always part of the affordability assessment. Credit searches will show any issues within the past six years. If you have experienced any severe problems in that time, it may be advisable to apply to a specialist bad credit lender.

Does the Length of my Interest-Only Mortgage Impact the Rates?

It can do, yes - some lenders will offer terms up to 25 years, whereas others will provide an interest-only mortgage up to 40 years.

You can also consider extending or shortening your mortgage term to improve the rates or lower your monthly payments.

Other options include fixed-rate interest-only mortgage providers.

For example:

  • 10-year fixed-rate interest-only lending will usually involve a higher rate since the term is shorter. However, you have the stability of a fixed monthly charge.
  • 7-year interest-only mortgages will likewise be higher in terms of interest given the brevity of the period but may offer a lower rate for an initial time.
  • 5-year fixed-rate interest-only mortgages will usually offer a fixed interest charge for the duration of the loan. Rates will depend on the deposit you can offer.
  • 3-year interest-only mortgages are available for short-term lending, with the best rates available by negotiating through a broker.
  • 2-year fixed-rate interest-only mortgages offer the shortest term, with potentially higher rates, but fixed for the two years of payments.

How Can a UK Broker Help Improve my Interest-Only Mortgage Rates?

As a whole-of-market broker, Revolution Brokers is not tied to any specific lender, product, or bank, and has the autonomy to recommend any product that we think is best for you.

Brokers who are tied to lenders can only offer products from their particular bank or provider, so there is much less choice, and less opportunity to find the most competitive deals on the market.

How Can I Avoid Paying Fees on an Interest-Only Mortgage?

All mortgages carry fees, as well as brokerage fees.

For more information about mortgage fees and costs, give the team a call on 0330 304 3040, and we will run through all the associated expenses to bear in mind.

Is There a Maximum Loan to Value on an Interest-Only Loan?

Some lenders will set an LTV maximum, and not accept applications above this, so a lot depends on the lender, the value of the property, and how much you wish to borrow.

Finding Low Interest-Only Mortgage Rates at 60% Loan to Value

If you have a 40% deposit or higher, you can secure the most competitive rates, and have the leverage to negotiate with multiple lenders who will accept your application.

Are There Good Interest-Only Deals at 75% or 80% LTV?

When the applicant has a lower deposit of 20% to 25%, you will still be able to apply to plenty of lenders, since caps tend to be at around 75% LTV.

However, the rates will be less competitive than for mortgages where a larger deposit is available. Lenders will also look at your credit score, income, and other criteria.

Can I get an Interest-Only Mortgage with only a 5% or 10% Deposit?

At this level of Loan to Value, it can be more challenging to find an interest-only mortgage. Most lenders will not be able to offer an interest-only product to an applicant with a deposit of 5% or 10%.

However, there are always options, and if you're keen to find interest-only lending with a small deposit value, give us a call on 0330 304 3040.

What Deposit on an Interest-Only Mortgage Will Get the Best Deal?

Loan to Value ratios work out the value of the property, against how much you're borrowing. Here is an illustration of potential deposit requirements for an interest-only mortgage of £200,000:

Loan to Value Ratio

Deposit Offered

Total Repayment

50%

£100,000

£100,000

60%

£80,000

£120,000

75%

£50,000

£150,000

80%

£40,000

£160,000

95%

£10,000

£190,000

Expert Advice with UK Interest-Only Mortgage Rates

The best strategy to find the lowest rates on interest-only mortgage options is to contact Revolution Brokers on 0330 304 3040.

We scour the market for the most competitive deals and negotiate with lenders on your behalf to secure the borrowing you need at advantageous interest rates.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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