Interest only mortgages are now becoming more and more difficult to get, and with recent reports showing that around 1.3 million with an interest only mortgage might well find it difficult to pay back the lump sum loan, they’re not something to be taken lightly. But used in the right way and an interest only mortgage could help you get on the property ladder, move home or buy a property specifically to let it out, allowing you to purchase cheaply and easily. If you’re looking to get an interest only mortgage, follow the tips below to maximize your chance of approval.
Prove that You Can Pay Back the Lump Sum
The major stumbling block to getting approved for any mortgage – but in particular, an interest only mortgage, is when you are unable to prove that you can pay it back. With an interest only mortgage, you’ll pay back the interest only for a fixed period of time, and then you’ll have to start making repayments towards the actual mortgage. When the mortgage matures and you’re expected to pay back the mortgage, you need to prove that you’re able to pay back that lump sum, either in one payment or over a period of time.
Lenders used to let people borrow on an interest only basis without demonstrating how they planned to pay it back, but this is no longer the case. A cash savings account, bonuses and commissions from your place of work will not be accepted and neither will a future inheritance. You have to have something solid.
Regular payments into an investment account, or a stocks and shares savings account should demonstrate that you’re serious about saving. A pension plan is also an option.
It’s unlikely that you’ll be accepted for an interest only mortgage if you’re a new buyer. However, if you already own your own home and you’re looking to switch to an interest only mortgage, or if you’re looking to move into a new home, or if you want to purchase a new home without selling your existing home, you may well get accepted provided that you own at least 25% of your home. Ensure that you have already built up a substantial amount of equity in your home before applying.
Prove that you can pay back the lump sum by providing detailed outlines of the money that you currently save, that you plan to save and that you’re already paying out. The more detail you can give and the less of a risk you appear to be, the more likely it is that you’ll get accepted.
Offer to Pay Part Repayment, Part Interest Only
Some lenders are willing to lend on so-called “half and half” mortgages, whereby 50% of your repayments pay off the interest, while 50% pay off the mortgage loan itself. This is still a cheaper option than a full repayment mortgage, but because you are paying off the mortgage while also paying back the interest, it’s a safer risk for lenders and you’ll be more likely to be accepted.
Buy to Let
Interest only mortgages are typical of buy-to-let loans as the money that you get from renting the property will pay back the interest, with the idea that any additional money that you get from renting the property on top of the interest only costs can be put into a savings account in order to pay back the lump sum when the mortgage matures. The lump sum repayment could also be paid back with the sale of the home. If this is the route you want to go down, detail your plans carefully when making your application. Explain that you’re planning to let for a certain number of years and that you will then pay back the lump sum with the sale of the home, as well as any strategies that you plan to use in order to ensure the timely sale of the house.
Interest only mortgage applications can be tricky, but follow the tips above and you might just get accepted.