Interest Only Mortgages

All you need to know about Interest Only mortgages

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ONLY FOR USE BY MORTGAGE INTERMEDIARIES

We can help if your customer wants interest only on their residential mortgage for part or the full balance.

On this page

Minimum Income Requirements

Eligibility

Acceptable repayment strategies

Evidence required for sale of the main residence/mortgaged property

Evidence required for various RPS

Keeping us up to date

Risks associated with an interest only mortgage

Next steps

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Minimum Income Requirements

Here’s a guide to the key eligibility criteria and the acceptable repayment vehicles. Also available to First Time Buyers.

Minimum Income Requirements:

Minimum sole income: £75,000.
Joint minimum income: £100,000.
For joint applications, eligibility criteria is met as long as one customer earns more than £75,000.

All income types in our Income and Packging hub can be considered.

Eligibility criteria

A maximum loan to value (LTV) of 75%.
A minimum interest only loan amount of £25,000.
The minimum age is 18 and the maximum age is up to their 70th birthday (or intended retirement age, whichever is lower). For joint applications the age of the eldest applicant should be used when calculating the term.
Where there is any element of interest only the maximum term is 35 years (30 years if a loan is more than £500,000).
Minimum term: 3 years.
Debt consolidation can be considered. This is on the “Capital and Interest” element, where it is on Mixed Repayment (Part & Part). Debt consolidation cannot be on the “Interest Only” element of the loan.
Interest only is available for joint applications, where only one party is a UK National, has Permanent “Right to Reside”, Settled or pre-settled status or Irish Citizenship. Please see Foreign Nationals.

Acceptable repayment strategies (RPS)

Here’s a list of all of our acceptable RPS. All repayment strategies must be in UK Sterling (GBP).

Sale of the main residence / mortgaged property.
Sale of other UK Property.
Investment Vehicles (within or outside ISA) Endowments Unit Trusts (EU Authorised) Open Ended Investment Companies (EU Authorised) Investment Company with Variable Capital (EU Authorised).
Stocks and Shares (Traded on an authorised exchange within or outside ISA).
Pension (UK authorised) 25% of current value.

Cash Savings.

Please note - it is acceptable to mix the above repayment strategies as the repayment vehicle except Sale of the main residence / mortgaged property.

Evidence required for sale of the main residence/mortgaged property

Second Residential – Sale of the mortgaged property

Where the customer is purchasing a second residential property and the repayment strategy is the sale of the second residential property, the following applies:

Where the property will be occupied on a permanent basis by the customer or their family, the main residential property criteria will apply, for example £200,000 equity and maximum 50% on Interest Only.
Where the property is not occupied on a permanent basis e.g. a holiday home then 75% Interest Only would be considered.
Where the property will be occupied on a permanent basis by the customer or their family then our Interest only letter will be required.
Where the property will not be occupied on a permanent basis by the customer or their family, please provide a memo to confirm how the home will be used confirming that it is not occupied on a permanent basis.

Evidence required for various RPS

Investment Vehicles (within or outside ISA), Endowments Unit Trusts (EU Authorised), Open Ended Investment Companies- OEIC (EU Authorised), Investment Company with Variable Capital (EU Authorised)

Statement from the provider dated in the last 3 months in the customer’s name with the value of the scheme.
The scheme provider must be a recognised investment manager and/or member of an appropriate financial services industry body.
The expiry date and ability to ‘encash’ the scheme must be on or before the end of the term. E.g. if the mortgage term is 5 years they must be able to encash within those 5 years and not after.

Stocks and Shares (Traded on an authorised exchange within or outside ISA)

Statement from the provider dated in the last 3 months in the customer’s name with the value of the scheme.
The scheme provider must be a recognised investment manager and/or member of an appropriate financial services industry body.
The expiry date and ability to ‘encash’ the scheme must be on or before the end of the term.
E.g. if the mortgage term is 5 years they must be able to encash within those 5 years and not after.

Pension (UK authorised)

Money purchase scheme – 25% of the current value will be used as the Repayment Strategy.
Final salary scheme – The guaranteed lump sum will be used as the Repayment Strategy.
Sight of an up to date valuation.
Where the current valuation is insufficient to repay the mortgage today, sight of a projection of the retirement schedule from the pension provider dated within the last 13 months.

Cash savings

Sale of other UK Property

We will only use the equity as it is at point of application (current market value less any mortgage amount) at 100%.

We require evidence the customer owns the property dated within
3 months of the credit application:

Land Registry search or;
Letter from a Solicitor (who is a member of the Law Society) on their stationery confirming the ownership and details of any charges and outstanding mortgage or confirmation there are none.

Evidence of the value of the property undertaken in the last year. This can be:

A formal valuation from a recognised Valuer with a recognised qualification or;
A recognised Estate Agent (and member of a national body) letter indicating a marketing price.

Confirmation that the property(ies) is/are insured, and details of the insurance must be contained in the application.

Keeping us up to date

The customer needs to:

Keep us informed of any changes to their repayment strategy, which might affect their ability to repay the mortgage at the end of the term. Where they have concerns they can contact us.
We expect that as their broker, if you review your customers’ finances in the future, that you would review their repayment strategies and ensure the customer keeps us informed of any changes in their circumstances.

Risks associated with an interest only mortgage

The amount of the loan outstanding will not reduce over the period of their mortgage – so they’ll pay interest on the full sum borrowed throughout the term and be more exposed to interest rate changes.
There is a greater negative equity risk than a repayment mortgage, which means they could end up owing more than their property is worth.

Next steps

If you'd like further guidance on our other policies, please visit our lending criteria page.

Lending criteria

Utilise our affordability calculators, to check our indication to lend for your customers.

Affordability calculators

If you believe your customer(s) may be struggling financially, find out how we can help here.