An interest only mortgage can be a popular choice for people who want lower monthly bills, but they can be difficult to acquire. Here we look at the different types of interest-only mortgages, including retirement, plus other ways to get a mortgage or release equity if you’re struggling with cash flow.
An interest only mortgage is where borrowers only pay the interest on the loan during its term, which could be up to 40 years or sometimes even more. Once the term ends the mortgage holder must repay the loan in full in a lump sum.
This hugely reduces monthly payments - with interest making up just a fraction of capital repayment mortgages. But borrowers need to prove how they will return the loan at the end of the term, which can make an interest only mortgage difficult to secure.
A reliable repayment fund could be in the form of cash savings, stocks and shares or a private pension fund. Borrowers could also say they will sell their home to release the equity and repay money that way, but due to the risk of house prices decreasing, lenders will usually only accept this if the mortgage applicant has a large deposit or equity already in the property. That can see older people at an advantage as they will probably have less time left on their loan.
These barriers to an interest only loan don't really apply for buy to let investments because the mortgage lender has an easy solution if the borrower is unable to repay the mortgage - they sell the property. Buy to let investors also are usually making more money in rent than they are paying in mortgage interest payments, so can save money through the term to repay the loan at the end.
Interest only mortgage pros
Interest only mortgage cons
Contact a mortgage advisor today to discuss getting the best mortgage deal for you.
A retirement interest only mortgage has payments that work the same way as a regular interest only mortgage - you repay solely the interest during the policy - but there is usually no end date. When the mortgage holder dies or goes into care the property is sold with some proceeds going to the mortgage lender to repay the loan. The policy can also end if the borrower sells the property.
For older people wanting a mortgage this can be easier to apply for than a standard interest only mortgage because you must only show you can afford the monthly interest payments, rather than how you will repay the loan at the end of the term.
Lenders only offer retirement interest only mortgages to certain age groups, such as between 55 and 85.
The amount an applicant can borrow depends on their retirement income, but it can be a way to avoid selling your home if you haven’t yet paid off your mortgage, or to buy a new home which is more expensive than the one you were previously in.
A retirement interest only mortgage is different to a lifetime mortgage which releases equity in the property in the form of a loan which is paid off when you die or go into care. We explain more about lifetime mortgages below.
You can get a mortgage with bad credit but it may restrict the number of products available to you. Lenders want to ensure the mortgage is affordable to the borrower so will take a number of factors into account when deciding whether to accept an application. A high deposit, low loan to value ratio or a high household income can all help swing the balance in your favour if you have bad credit.
There is no minimum credit score that a mortgage provider accepts as every application presents its own set of circumstances. Lenders will also look at recent bank statements to assess monthly outgoings, so if it looks like you’re spending much less than what you're bringing in, you may look more favourable.
Missed and late payments are wiped from a credit score after six years so some may decide to wait to apply for a mortgage to build up their score. A mortgage for a shared ownership may also have higher chances of being accepted as you are trying to buy a smaller percentage of the property.
Unfortunately a bad credit score affects a partner’s credit score too when applying for a joint mortgage or other loans and credit cards.
A lifetime mortgage is a form of equity release where lenders give money which is repaid once the borrower dies or goes into care. Interest is added to the loan but this doesn’t necessarily have to be repaid until the property is sold. If interest isn’t paid it will be added to the loan amount, with the monthly interest rising each month because the loan is bigger. This could cut the inheritance you can give to your family when you die.
A lifetime mortgage can be helpful for people who would like more money for their retirement without having to sell their house. But there is no end date set for the loan, so the money could run out before you die or are taken into care. A lifetime mortgage is different to a retirement interest only mortgage which is like a standard interest only mortgage rather than equity release.
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