The interest-only mortgage criteria
In this brief guide, we are going to discuss what the interest-only mortgage criteria are for most lenders.
The eligibility criteria for mosy interest-only mortgages has changed in recent times as many mortgage lenders react to the new economic changes and financial regulations which have been brought in to protect the borrowers and the economy.
After the 2008 financial crisis, a lot of borrowers defaulted on their interest-only mortgages due to the insurance policies which were linked to those interest only mortgages not performing as they were intended to.
In reality, these interest-only mortgages were mis-sold to many borrowers without due consideration to how risky they were and how they could perform under different economic situations.
What are the interest only mortgage criteria for borrowers?
The interest-only mortgage criteria for most borrowers include:
- A suitable capital repayment vehicle
- Usually up to 60% LTV
- Mortgage deposit of 20% +
- A good credit score
- Maximum age of 70 yrs
These are just the basic eligibility requirements for an interest-only mortgage and the criteria may differ from one mortgage lender to another.
How interest-only mortgage criteria has tightened?
The interest-only mortgage criteria has tightened in recent years due to the economic crisis and many borrowers defaulting on their interest-only mortgage.
The defaults were mainly due to the linked endowment policies underperforming.
Most borrowers had relied on this as their only repayment plan and when these policies failed borrowers were forced to face losing their homes through home repossessions or finding the funds to pay off the capital balance borrowed through alternative means.
Another issue which resulted from the 2008 financial crisis was that many homes lost their values and a lot of borrowers on interest-only mortgages found themselves in negative equity.
This meant that finding mortgage lenders who would remortgage their interest-only mortgages to capital repayment mortgages as a means to pay off the outstanding balance on their interest-only mortgage just became much harder.
After the 2008 financial crisis, many interest-only mortgage lenders have now tightened their interest-only mortgage criteria which means getting an interest-only mortgage is now much harder than before.
To get an interest-only mortgage you will now need to have a very reliable capital repayment vehicle which the mortgage lender will review at several intervals during the interest-only mortgage.
Have interest-only mortgage criteria relaxed a bit?
Yes, interest-only mortgage criteria have slowly begun to relax in recent years.
Most borrowers are now surprised to find that they meet the eligibility requirements for an interest-only mortgage.
Most interest-only mortgage lenders will now accept the sale of the property or the remortgage of the property as a suitable capital repayment plan.
Some interest-only mortgage lenders have also now increased the maximum age for which they will consider borrowers and others have even removed maximum ages from their interest-only mortgage criteria.
What sort of repayment plans do lenders accept?
Mortgage lenders are now more strict on what capital repayment plans they will accept.
You will need to have a watertight plan on how you will repay the capital balance at the end of the mortgage term.
Regardless of what your capital repayment plan is you will need to provide as much evidence to the mortgage lender that your capital repayment plan will be viable at the end of the interest-only mortgage term.
Some of the capital repayment vehicles which most mortgage lenders will agree to include:
- Sale of the property
- Sale of another property
- Sale of another asset
- Investments such as ISAs, bonds
- Sale of another asset
- Downsizing the property
- Remortgaging the property to a capital repayment
- Equity release
- Receiving an inheritance
What is the loan to value requirements of an interest-only mortgage
Most interest-only mortgage criteria will require mortgage deposits of around 40% to 50%.
This means you will be offered a loan to value of around 50% to 60%.
Some mortgage lenders will now offer part and part mortgages which can significantly reduce your mortgage deposit requirements as the mortgage will now be less risky to the mortgage lender.
Use an interest-only mortgage broker
You may want to consider using an independent mortgage broker to get a mortgage.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
FAQs: The interest-only mortgage criteria for borrowers
Why would you get an interest-only mortgage?
There are various reasons why you may want to get an interest-only mortgage.
Interest-only mortgages gave a lower monthly mortgage repaymentInterest-only mortgages allow you to benefit from short term capital appreciation when the property is sold within a few years.
Interest-only mortgages are harder to default on during the mortgage term due to the low monthly mortgage repayments.
In this brief guide, we discussed what the interest-only mortgage criteria are for most lenders.
If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.