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Residential Interest-Only Mortgage Options

Independent guidance about the prospect of taking out an interest-only mortgage on a residential property - discover how this might work and the eligibility requirements a lender will need to assess.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2024-06-15
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Residential Interest-Only Mortgage Options

Revolution Brokers receives multiple enquiries from homeowners or prospective buyers looking to explore the potential of interest-only mortgage borrowing.

As a specialist interest-only broker, we have compiled this guide to explain all you need to know about residential interest-only borrowing.

For tailored advice with your application, contact Revolution Brokers on 0330 304 3040 or email us at [email protected].

How Does a Residential Interest-Only Mortgage Work?

This type of mortgage means that you pay a monthly interest charge, without paying back any of the original balance.

The total borrowed falls due at the end of the term, unlike a repayment mortgage that will be repaid in full by the end of the period.

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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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What are the Advantages to Interest-Only Residential Mortgages?

  • You pay less per month, given that payments only include an interest element.
  • If your property increases in line with inflation, your debt can reduce, with borrowing of, say, £100,000 reducing within 25 years when your term ends.
  • Some lenders offer penalty-free early repayments, meaning you can gradually reduce the capital balance.

What are the Disadvantages to Residential Interest-Only borrowing?

  • You need to have a way to pay back the original loan when the term ends, even if that means reselling your home.
  • If you can't repay the original balance, your home is at risk of repossession.
  • Refinancing from interest-only to repayment can be complicated.

What are the Advantages of a Repayment Residential Mortgage?

  • Repayments include both interest and principal, so your total debt reduces over time.
  • There is no residual sum still owing at the end of the term.

What are the Drawbacks of Choosing a Repayment Home Mortgage?

  • The monthly cost is higher than interest-only.

Potentially yes - if you have a good deposit or enough equity in your property, a Right to Buy lender might offer an LTV of up to 70%, meaning you need a 30% deposit or equity ownership.

Remember that you will still need a repayment strategy for the balance owing at the end of the term.

Can Residential Interest-Only Mortgages be Remortgaged?

They can indeed; if you want to remortgage an interest-only residential loan, give the team a call on 0330 304 3040.

What Repayment Strategies Can I Use for an Interest-Only Residential Loan?

There are several acceptable repayment vehicles:

  • Selling the property - although not accepted by all lenders.
  • Selling another portfolio property.
  • Using savings or ISA funds.
  • Planning on an inheritance - valid if already under probate.
  • Cashing in investments, such as bonds or shares.
  • Withdrawing a lump sum from your pension fund.

Is There a Maximum Interest-Only Residential Mortgage Value?

Not usually no - lenders will look at how much you earn and their affordability assessments to decide how much they can offer to lend.

For example, if you apply for a £200,000 interest-only mortgage, but the lender is not satisfied that your repayment vehicle will cover this amount, they might offer you a part and part mortgage with £100,000 of the loan on an interest-only basis, and the balance repayment.

What Loan to Value is Available on Residential Interest-Only Borrowing?

Most lenders will offer up to 75% of the property value, with some going up to 80% or even 85% in specific circumstances.

Providers will need to review the source of your deposit, with rules meaning that some deposit sources such as a gift will need to be verified before the loan is formalised.

Many lenders will also underwrite a gifted deposit requiring the giver to release the property from their financial interest.

How Much Can I Borrow Interest-Only Against my Salary?

In most cases, a lender will calculate up to four times your annual salary, with a few niche lenders offering as high as six times if you meet all other criteria.

Income sources can include multiple streams, depending on the policy of the lender, such as:

  • PAYE salary
  • Additional benefits
  • Pension payments
  • Second employments or business income

If you are self-employed, then a lender will consider:

  • Your trading history, with the ideal being three years of records and tax returns.
  • How much income you draw from the business. Some lenders will consider the average of two years drawings, others three years, and others will take into account retained profits left in the company.

Does My Credit Rating Impact my Interest-Only Home Mortgage?

It can do, yes, with some lenders having strict rules about accepting applicants with recent bad credit history.

There are lots of issues that can impact your credit rating:

  • Having a low or no credit score.
  • Mortgage arrears on your file.
  • Having CCJs, IVAs or DMPs.
  • History of defaults.
  • Bankruptcy or repossession history.

In this circumstance, it is often best to apply to a specialist bad credit mortgage provider who offers products specific to your scenario.

Does the Type of Property Impact my Interest-Only Mortgage Offer?

Mainstream lenders are most comfortable with standard bricks and mortar properties. If you are buying any property like the examples below, a niche lender is your best bet:

  • A listed building.
  • An ancient property.
  • A timber-framed construction.
  • A home with a thatched roof.
  • A concrete prefabricated home.

Can I Get an Equity Release Mortgage on my Home?

Retirement mortgages are aimed at borrowers over 55. Usually, they mean that you borrow against the value of your home, with the loan repaid (generally with interest rolled up) when you pass away or go into care.

Are there Buy to Let Interest-Only Mortgages?

Investors and landlords often prefer an interest-only mortgage, and the rules vary from a residential loan. Lenders will usually require a deposit of at least 25% and will charge higher rates given the increased risk factor.

Some will have a mandatory minimum income level, whereas others will only require that rental income meets over 125% of the mortgage payment value.

Lenders will often require a repayment vehicle, for the assurance that the loan will be repaid.

Can I Use a Residential Mortgage for a Buy to Let Investment?

Buy to let mortgages are a different product, with a different risk assessment process than a residential mortgage. If you have a residential loan and wish to let out your property, you need permission from your lender, or sometimes to remortgage to a new product.

Letting out a property being purchased through a residential mortgage can constitute mortgage fraud, so it is vital to seek permission or switch to a landlord mortgage as required.

Can I Get an Interest-Only Mortgage on a Second Home?

You can - although in most cases, you must spend a minimum period living in the property without subletting it, or running a business from home.

Are Shared Ownership Mortgages Available Interest-Only?

Usually, a shared ownership mortgage is only available on an interest-only basis if you can offer a significant deposit of at least 50% of the mortgage value.

Can I Get Interest-Only Lending on a Self-Build Mortgage?

Potentially, and this can be a great way to manage cash flows while you build a new property. However, you usually need at least a 25% deposit with a 75% LTV cap.

Are There Secured Interest-Only Loans on a Residential Home?

Yes, you can apply for an interest-only secured loan in a similar way to a mortgage - although the same rules apply about having a repayment strategy.

This loan is secured against the property as a second charge, and therefore the lenders can be more flexible in the terms and eligibility requirements.

Can I Get an Interest-Only Mortgage for a Large Value?

Provided you apply to the right lender, you can secure an interest-only mortgage for substantial property purchases - dependent on being able to provide evidence of a suitable repayment vehicle, and having a sufficient deposit.

The best solution is to use a whole-of-market broker such as the mortgage brokers team since it is vital to negotiate competitive rates given the size of the mortgage.

Which Lenders Offer the Lowest Interest Rates on Residential Interest-Only Lending?

UK lenders will work on different scoring assessments, and the amount they can lend may vary significantly.

It is essential to use an independent broker with the leverage to identify products from any lender in the market, as well as support your application and negotiate favourable terms.

Expert Support with UK Residential Interest-Only Mortgages

Whether you're considering an interest-only mortgage application or would like to compare the costs between different products, the Revolution Brokers team can help.

Give us a call on 0330 304 3040 or email the team at [email protected] for independent advice from an expert whole-of-market broker.

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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