Mortgage Lender Criteria for Interest-Only Lending

Question 1

Who Can Apply for an Interest-Only Mortgage?

Answer

You can apply for an interest-only mortgage on a residential property, as long as you fall into the criteria that your lender can accept.

Lending rules for interest-only mortgages are relatively strict, and a mortgage provider will need to know your repayment strategy, as well as meeting other criteria:

Affordability evidence to show you can afford the mortgage.
A requisite deposit amount.
Proof of your exit strategy.

Question 2

What Happens When my Interest-Only Mortgage Ends?

Answer

When you take out an interest-only mortgage, you need to demonstrate your repayment vehicle that will cover the original amount owed.

There are several options available when your mortgage term ends:

Apply for a remortgage to extend the loan term.
Consider equity release options for homeowners over 55.
Remortgage with another lender.
Repay the mortgage balance from savings or your pension fund.
Sell the property to repay the debt.
Switch to a repayment mortgage through another lender or product.

Question 3

What Plan Can I Offer as a Repayment Strategy on an Interest-Only Mortgage?

Answer

Different lenders have different policies, and there will be repayment strategies that some accept, and others do not.

High street banks typically ask for at least one of the following repayment strategies:

Property Sale: usually selling your current property and downsizing to a smaller home. Many lenders will not accept this repayment strategy or may require minimum equity of between £100,000 and £200,000.
Investment Funds: typically ISA savings, investment bonds, the sale of stocks or shares, or the sale of unit trusts. In any case, the lender will need to see evidence of the investment value, and the projected value at the end of the term.
Pension Lump Sums: another option is to take advantage of the 25% tax-free pension fund withdrawal, and use that cash to repay your mortgage. However, note that if you withdraw more than 25%, you will be taxed on the remainder.
Endowment Policies: many lenders will reject this repayment strategy, as in the past they have failed to grow as projected, meaning a borrower cannot repay their mortgage. You will need to negotiate with your lender to repay via an endowment policy, with stable projections as to its future worth.
Asset Sales: if you hold other assets, such as another property, investment or valuable, they may be used as an exit strategy whereby a sale would raise funds needed to repay the mortgage.

Question 4

Does My Interest-Only Mortgage Strategy Need to be a Certain Value?

Answer

The repayment strategy should be equivalent to the value of the amount borrowed to purchase your home.

Generally, assets grow in value over time, so you don't necessarily need to have the cash to hand - but do need to demonstrate that growth will be sufficient to repay the mortgage at the end of the term.

Some lenders will enforce a minimum value repayment strategy, but there are lots of options here. If you have been turned down for an interest-only mortgage on the strength of your repayment strategy, call Revolution Finance Brokers on 0330 304 3040, and we will run through the options.

Question 5

Do Landlords Need a Repayment Strategy for an Interest-Only Buy to Let Mortgage?

Answer

No, usually not - because this is an unregulated mortgage product, and lenders don't need to pass the same checks as for a residential interest-only mortgage.

Landlords can use the rental income to pay the interest or to pay top-ups on the mortgage balance to bring down the total outstanding on the capital loan.

Usually, the mortgage term will come to an end, and the balance will need to be paid. This can be through selling the property, remortgaging or refinancing.

If you reach the end of a BTL mortgage term and have exceeded an age cap with your lender, and are therefore unable to secure a remortgage, give us a call, and the Revolution team will recommend lenders who can offer a remortgage deal.

Is There a Maximum I Can Borrow Through an Interest-Only Mortgage?

The maximum value will depend on several factors:

How much you earn.
What deposit you have available.
Your credit history and rating.
What sort of property it is - i.e. residential or buy to let.
Your income structure.

Question 6

How Much Deposit Do I Need for an Interest-Only Mortgage?

Answer

The deposit depends on the Loan to Value ratio - i.e. how much you want to borrow in proportion to the value of the property.

For example, if you want to buy a home for £300,000 and have a deposit of £30,000, that means you have a 10% deposit and need a 90% LTV mortgage.

Lenders have different policies on maximum LTV ratios, and you can find providers with high LTV caps if you have a small deposit, by working with an experienced broker.

Usually, lenders will offer a maximum LTV of 75% - so you will need a 25% deposit. A smaller proportion will accept a 20% deposit, and others can offer to lend against a 15% deposit, although this depends on meeting other vital criteria.

Question 7

Does My Annual Income Impact How Much I Can Borrow Interest-Only?

Answer

It does - while most high street lenders won't have a minimum annual income threshold, they will need to see that you can afford the repayments.

Some interest-only mortgage providers only accept applicants with high incomes, and others will rely on the strength of your exit strategy to make a decision.

There is also an alternative option to take out a 'part and part' mortgage. This product is a combination of repayment and interest-only borrowing, with some of the lending repaid, and some on an interest-only basis.

Where a lender does require a minimum income, it tends to be around £50,000 for a single applicant, or £75,000 for a couple.

Question 8

What Type of Income is Accepted by Interest-Only Mortgage Lenders?

Answer

Below are the typical types of income considered by mortgage providers when calculating how much they can offer to lend:

Salaries - most lenders use your annual salary to calculate the maximum they can lend.
Variable income - additional pay, such as overtime or bonuses, can be included, depending on the lender.
Self-employment profits - a lender will consider your net profit, and multiply it by their policy multiple to arrive at a maximum.

If you work part-time, or in a temporary role, you will usually find that the lender will add together all income streams to calculate an annual average income.

Retired applicants will be asked for a copy pension statement to demonstrate their regular income.

Question 9

How Much Can I Afford to Borrow on an Interest-Only Mortgage?

Answer

Lenders tend to work at a multiplier of four times your annual income to decide on the maximum they can lend. Specialist lenders can lend up to five or even six times your salary.

Maximum mortgage values depend on the lender - for example, the below table shows three lenders with different affordability calculations, and how the maximum loan value changes depending on their policies:

Lender	Affordability Calculation Basis	Applicant Annual Salary	Maximum Interest-Only Mortgage Offer
A	4 x annual income	£45,000	£180,000
B	5 x annual income	£45,000	£225,000
C	6 x annual income	£45,000	£270,000

Question 10

How Does the Value of my Repayment Vehicle Impact my Maximum Mortgage Offer?

Answer

Generally, a lender will calculate the value of your repayment vehicle, and use that to determine the maximum they can lend.

Affordability on an interest-only mortgage will always be no more than the total of your assets, savings, or investments.

If you plan to repay your interest-only mortgage through a property sale, and the equity in the property is £150,000, then a lender can only lend up to £150,000, as this is the value available to repay the debt.

In some cases, the lender will cap the mortgage at a fixed percentage of the equity, in which case they will offer less than £150,000.

Say you wanted to sell the property to repay the interest-only mortgage. In that case, you need to have a minimum amount of equity. Some lenders set this minimum at £100,000, and some as high as £200,000.

Question 11

How Does a Part Repayment and Part Interest-Only Mortgage Work?

Answer

A blended mortgage is a way to split the lending, with some of the balance paid on a repayment basis, and the rest interest-only.

This is a lower risk to the lender, and therefore the eligibility criteria are less stringent.

Mortgage Lender Criteria for Interest-Only Lending

Discover What Our Customers

About your mortgage

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