Who Offers Interest Only Mortgage Loans

Which Lenders Offer These Mortgages

Despite many lenders having withdrawn their interest-only products from the market following the financial crisis in 2008, an increasing number of lenders are re-introducing this type of deal, and there are currently over 35 across the market offering them.

The vast majority of lenders have significantly stricter criteria for interest-only lending, with many having fairly high minimum income and equity/deposit requirements. Some lenders, however, such as HSBC and Barclays are currently offering this type of product with no minimum equity requirement.*

Some examples of current lenders offering interest-only products and their relevant criteria are provided in the below table.*

*Correct as at May 2022, please note that rates and criteria are subject to change*

What Is The Best Interest

The best interest-only mortgage is one that suit you and your circumstances. Look out for deals that offer affordable monthly payments and low repayment charges.

Interest-only mortgages will generally charge higher interest rates than a standard repayment mortgage.

You might want to speak to a mortgage broker to help you find the most suitable interest-only mortgage deal for you.

Interest Only Loan Calculation

Here is an example of what you can expect from interest only lenders when it comes to your payment. You can see the difference between a traditional loan and the interest only loan at 6%.

Loan Amount $400,000 Principal Payment $478.70Total Payment $2,398.20

Monthly Savings with the interest only mortgage is $478.70. That difference in payment means you can afford an additional $80,000 with an interest only home loan.

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How Does An Interest

Interest-only mortgages typically come in standard mortgage terms of between 15 and 30 years, though there are a few that will go as long as 40. By the end of the loan term, the principal balance will be fully repaid, no matter how the interest-only feature is structured.

The interest-only phase of the loan will usually run five or 10 years, based on the loan term. For example, the interest-only phase will be five years on a 15-year loan, and 10 years on a 30-year loan.

Once the interest-only phase ends, youll be required to make payments of both interest and principal over the remaining balance of the loan.

Because you havent made principal payments during the interest-only phase, the monthly payment will be dramatically higher once principal is added to the monthly payment.

This increase is largely due to the reduced term of the loan payoff. Instead of amortizing the principal on a 30-year loan over the full 30-year term, it will be paid in just 20 years. That will result in substantially higher payments than wouldve been the case if you had taken a standard fully amortizing loan.

What Youll Pay Each Month

Monthly payments depend on your interest rate and whether the interest rate adjusts during the repayment period or is locked at a fixed percentage of the balance. Its important to remember that during the no-interest period of the loan, your equity balance wont change, which means you will never pay less each much unless your interest rate adjusts lower.

Heres an example of how it works: You buy a $350,000 home and make a $150,000 down payment. You take a 30-year mortgage interest only loan that carries a 7% interest rate during the first 10 years. During the interest only period, the monthly payment will be $1,166.67, unless your interest rate adjusts. After that, you begin paying both interest and principal and the loan amortizes mortgage for the next 20 years.

A key difference between a conventional fixed and interest-only loans: Payments on a conventional loan is the same every month, but the amount of interest you pay, gradually falls and the principal portion increases as the loan is paid down. An interest-only loan payment is based on both the interest rate and the balance, so it can be variable. If the interest rate adjusts, or you make extra principal payments, the monthly payment can change. And, of course, when the interest-only period ends, the minimum monthly payment will jump.

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What Are Some Important Target Dates In An I

Introductory period. Many option ARMs have a 1-month or 3-month introductory period at the beginning of the loan. During this period, lenders use a lower interest rate to calculate your payments. For some I-O mortgage payment loans, this introductory period lasts 1, 3, or 5 years.

Interest rate adjustment period. Most payment-option ARMs have interest rates that adjust monthly after the introductory period. You could find that the interest you owe increases even though your minimum payment stays the same each month, adding to your negative amortization. Typical interest rate adjustment periods for an I-O mortgage are monthly, every 6 months, or once a year.

Payment adjustments. Most I-O payment mortgages and payment-option ARMs have payments that adjust once a year. In addition, most of the adjustments on payment-option ARMs are limited by a payment cap, usually 7.5%. Keep in mind that payment caps do not apply when your loan is recalculated at the normal recalculation period. Payment caps also do not apply if your balance grows beyond 110% or 125% of your original mortgage amount.

Who Might Want An Interest

You may want to consider one of these loans if:

You want or need short-term cash flow. A very low payment during the interest-only period could help free up cash.

You plan to own the home for a short time. If you move frequently or youre buying a home as a short-term investment, an interest-only mortgage may work.

Youre buying a second home that youll turn into your primary residence. People nearing retirement, for example, might buy a vacation home that theyll move into full time in a few years and pay off or refinance the interest-only loan.

You expect to be able to pay off the mortgage before the initial rate adjustment or soon after.

You expect an income increase or windfall if youre planning to keep the interest-only loan.

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Jade Mills Estates Director Coldwell Banker Beverly Hills

Our Complex and Interest-Only Loan Program has the following added features:

Various income sources used in income analysis including recent income.

Liquid asset consumption as part of income analysis.

Interest-only programs available for primary, second home, and investment properties.

LLC, blind trust, irrevocable trust and corporate vesting welcomed.

June: First Mortgage Deals Launched Under Help To Build Equity Loan Scheme

Today sees the launch of a government-backed scheme designed to help buyers with small deposits onto the property ladder with homes tailored to their exact requirements.Help to Build, which is available in England only, offers self or custom home-builders an equity loan of between 5% and 20% , so long as they can put down a deposit of at least 5%.

This means that for the first five years, repayments are interest-free. In year six, interest is charged at 1.75%. Repayments then increase every April based on the cost of the Consumer Prices Index measure of inflation plus a further 2%. CPI currently stands at a 40-year high of 9.1%.

Borrowers can pay back the equity loan at any time after the build is finished but it must be repaid in full by the end of the mortgage term or when the home is sold, whichever happens sooner.

Because its an equity loan, the amount you owe grows relative to the property value. This means if house prices go up, you will pay back more than you initially borrowed.

The Help to Build equity loan is not exclusively for first-time buyers, but you must live in the newly-built home as your only property to be eligible. It is not available to upgrade a home you already live in. Finally, you will need outline planning permission for the land you want to build on before you can apply.

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Who Would Want One

For someone who wants their money for cash flow so they can invest it elsewhere, an interest-only loan can make sense. It can also help someone who is only paid a few times a year on commission, or expects to have a substantial salary increase in the coming years.

“It’s a way to utilize your money for other purposes” such as paying off debt, funding retirement or having money available for investments, Kendall says.

“For the most part, interest-only loans have returned to the domain of the private wealth client,” says Brian Koss, executive vice president of Mortgage Network in Danvers, Mass. “These are qualified individuals who are deemed sophisticated and wealthy enough to take the risk, since they generally have enough assets to cover any increase in payments.”

“Lenders are comfortable that these people know what they are doing and can handle the pain if they are wrong,” Koss says.

Interest-only loans are also popular for construction loans, an equity line, and among the affluent who can afford to pay off the mortgage entirely if they need to while using the loan as a way to better manage their money.

Downsides are that interest-only loans allowed borrowers to buy more home than they could afford, and market conditions could hurt them more because they aren’t building equity in the house during the interest-only period.

What To Do If You Cant Repay An Interest

Under the conditions of your mortgage, lenders will have the legal right to repossess your home if a loan has not been repaid by the end of the term.

The good news is that, if youre coming to the end of an interest-only deal and are worried about not being able to pay it off, you do have options.

1. Switch to a repayment mortgage: your lender might let you do this – but bear in mind that it would cause your monthly payments to shoot up in the short term. However, you may be able to reduce the payments by lengthening the term of your mortgage or opting for a part-interest-only, part-repayment deal.

2. Extend your mortgage term: if you cant afford the steeper monthly payments that a repayment mortgage would incur, even if you extended the term, you could ask whether you can extend the term of your interest-only deal. This would buy you extra time to invest money or for your property’s value to grow in order to cover the shortfall if you were to sell.

3. Remortgage: you may be able to cut interest costs by moving to a more competitive interest-only deal. However, this is unlikely to be an option if you’re in negative equity, and you’d also need to go through a standard mortgage application process which might not be ideal depending on your circumstances,

5. Use some of your pension: you can withdraw up to 25% of your pension as a tax-free lump sum – but do factor in the impact this will have on your retirement income before making any decisions.

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What If I Am Struggling With My Repayment Plan

Contact your lender as soon as possible if for any reason you are falling behind on your repayment plan or you are worried you soon could be. It is likely to discuss alternative options with you such as transferring all or part of your loan onto a repayment mortgage.

Post Covid, the Financial Conduct Authority is encouraging lenders to make switching to alternative mortgage deals easier for borrowers.

Still Available But Tougher To Get

Some banks still offer them as non-QM loans, with stricter requirements.

Bank of the West, for example, offers interest-only loans under the same qualifying terms as it does other non-QM loans, Kendall says. That includes having a low debt-to-income ratio of 43 percent or less.

The bank also ensures the borrower can afford the payments at the end of the five-year ARM, for example, which can be up to 5 percentage points higher than a traditional loan, she says.

A higher income isn’t necessary, she says, though it may help them have the required three years of payments in reserves. Bank of the West’s approach to making interest-only loans is assessing the ability to repay, Kendall says.

Wells Fargo, the biggest residential lender in the country, has stopped offering most customers the interest-only version of its home-equity line of credit. Customers can still get the interest-only option if they have significant assets and show they can afford a bigger bill when the principal is due.

Only a handful of private banks offer interest-only mortgages, and their requirements vary greatly, Koss says. “There is some flexibility among them, but generally speaking, these banks have to document everything,” he says.

Borrowers should be prepared to meet the same standard as Fannie Mae’ guidelines for interest-only loans, he says, including a maximum loan-to-value ratio of 70 percent, a credit score of 720 or higher and a minimum of two years of reserve assets after the loan closes.

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The Downsides To Interest

First off, these loans typically charge higher interest rates than conventional mortgages. The lowered monthly cost only comes from kicking the principal payment down the road to a later date.

And because you are paying a higher interest rate, and making more payments on interest overall, you also will pay more in interest over time, compared to a conventional loan.

Also, there’s a risk that mortgage rates could rise over time, as has been the case recently. This would make the monthly payments more expensive than initially expected after the interest-only period ends. The burden of those added costs could put borrowers at risk of defaulting on the loan.

Rate hike increases are usually capped at about 2% after the initial interest-only period expires, but that can still be a significant expense.

Another risk is that if your home loses value, selling the property later may not cover the total cost of the loan.

“Think about why you’re considering it,” says Shayowitz. A bad candidate for an interest-only loan would be someone looking to “shave off a few dollars” of their monthly costs just to get into a home they may not qualify for otherwise.

“So much of this boils down to putting pen to paper,” says Andy Darkins, a certified financial planner with wealth management firm Vista Capital Partners. He advises would-be buyers to do a “stress test” of their short- and long-term cash flow before considering an interest-only loan.

The Cons Of An Interest

Choosing an interest-only loan could be a risk for borrowers. Some cons with this type of loan include:

• Youre not building equity in the home: Building equity is important if you want your home to increase in value. With an interest-only loan, you arent building equity on your home until you begin making payments towards the principal.
• You can lose existing equity gained from your payment: If the value of your home declines, this may cancel out any equity you had from your down payment. Losing equity can make it difficult to refinance.
• Low payments are temporary: Low monthly payments for a short period of time may sound appealing, but they dont last forever it doesnt eliminate the eventuality of paying back your full loan. Once the interest-only period ends, your payments will increase significantly.
• Interest rates can go up: Interest-only loans usually come with variable interest rates. If rates rise, so will the amount of interest you pay on your mortgage.

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Who Can Get An Interest

You can get an interest-only mortgage on a residential or buy-to-let basis however, the lending criteria might mean this isnt a viable option for you if you’re a first-time buyer.

Residential interest-only mortgages have strict lending criteria. Typically lenders will only allow you to borrow up to 50% of the property value, so you will need to have a large deposit or equity in your home to make up the rest.

Some lenders will also only lend on an interest-only basis to high-net-worth individuals with incomes of £100,000 or more.

So a residential interest-only deal probably isnt the best mortgage for a first-time buyer, but could potentially be an option for wealthy individuals with a big deposit or existing homeowners with a lot of equity looking to remortgage.

The rules on buy-to-letinterest-only mortgages are less strict. Thats because interest-only borrowing is standard for these types of purchases as landlords will be earning rental income and be treating the property they buy as an investment, rather than their home.

• Find out more: buy-to-let mortgages

Should I Get Advice About Interest

We recommend that you get independent financial advice about how youre planning to repay your interest-only mortgage. You can search the Financial Services Register to find mortgage brokers that are authorised by the Financial Conduct Authority.

The Single Financial Guidance Body has examples of ways you can repay your interest-only mortgage but well need to agree your plan before we can approve your mortgage application.

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Calculate Your Repayments After The Interest

Work out how much your repayments will be at the end of the interest-only period. Make sure you can afford the higher repayments.

Give yourself some breathing room. If interest rates rise, your loan repayments could go up even more.

Work out your repayments before and after the interest-only period.

Year Interest Only Mortgages

These resemble conventional 30-year mortgages with a caveat: borrowers dont pay principal at the outset, usually for the first 10 years. Since the repayment period is the same as a standard 30-year loan, monthly principal payments in the final 20 years would be higher than they would if principal were paid from the beginning. Lenders generally want larger down payments and charge higher interest for these loans since they are considered risker than conventional loans.

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