Would an interest-only mortgage be a suitable solution for a remortgaging homeowner worried about high mortgage rates? And if so, are they still available for residential borrowers? Darren Polson clears things up…
The Question
I’m due to renew my mortgage later this year and I am expecting the rate to have jumped quite a lot. I took my currently deal out during the pandemic and my mortgage rate was low, so I am bracing myself for higher repayments.
I wondered if taking out an interest-only mortgage would be a good option to help me manage my repayments until interest rates fall further. Do lenders still offer these mortgages and how would I obtain one?
Darren’s Answer
Yes, many lenders still offer interest-only mortgages but there are strict criteria.
With an interest-only mortgage, you do not repay any of the mortgage balance (capital) and only pay back the interest monthly. At the end of the agreed term, you have the full mortgage balance (capital) left to pay.
This means you need to have a repayment vehicle or sell the property to repay the mortgage. Please note – not all lenders allow sale of property as a repayment vehicle.
Interest-only is more common for a buy-to-let mortgage. This is due to the lesser risk as it is not the main residence, as well as the renter paying most or all the interest payment.
As a repayment vehicle, landlords can put aside their profits to pay back the full capital when the time comes.
Regarding criteria, applying for an interest-only mortgage can result in:
- Increased lender criteria such as salary minimums
- More interest paid back than a repayment mortgage
- Risk of a shortfall at the end of the mortgage term
- Higher deposit required to obtain the mortgage
- Requirement to have a repayment vehicle to cover the full mortgage balance such as savings or pension
You have noted that you’re considering an interest-only mortgage to help deal with rising interest rates or to make your payments more manageable, but please note that this might not be your best option in this case.
If you are having difficulty with you mortgage payments, please reach out to your lender or speak to a mortgage broker who can offer support.
Meet our expert…
Darren Polson is head of mortgage operations at Aberdein Considine. He has been writing a regular column for What Mortgage for over two years and is now here to answer YOUR questions.
If you have a question for Darren please email kate.saines@emap.com or leave a message in the comments below.
