Interest Only Mortgages | Mortgage Advisor Explains

Podcast Hosts:

Gemma – Host
Ifthiaker (Ifthi) – Accountant and Mortgage Advisor

Introduction

Gemma:
Today we’re talking about interest-only mortgages – what they are, who they suit, and what you should know before considering one.

Q&A Discussion

Q1: What is an Interest-Only Mortgage?
Ifthi:
An interest-only mortgage means you only pay the interest on your loan.
Example:
Property value: £200,000
Loan: £100,000
Term: 25 years
At the end of the term, the principal balance remains £100,000, unlike a repayment mortgage where the balance reduces to zero.

Q2: Why Are Interest-Only Mortgages Popular for Buy-to-Let Properties?
Ifthi:
Popular for investment properties because it maximizes cash flow.
Example:
Repayment mortgage: £1,000/month (£500 interest + £500 capital)
Interest-only: £500/month (interest only)
Extra £500 can be saved to invest in additional properties.
Investors often sell properties later to repay the bank and realize capital gains.

Q3: Are Interest-Only Mortgages Available for Residential Properties?
Ifthi:
Available but less common.
Conditions apply:
High deposits required (e.g., £300,000 or more)
Must have a credible repayment vehicle like a pension plan or other qualifying assets.
Banks aim to ensure the mortgage can be repaid at the end of the term.

Q4: What Were the Historical Challenges with Residential Interest-Only Mortgages?
Ifthi:
Previously linked to endowment policies.
Many homeowners fell short on repayment at the end of the mortgage.
Resulted in negative press and stricter bank criteria.
Today, most banks prefer repayment mortgages for residential properties.

Q5: What Are the Key Advantages of Interest-Only Mortgages?
Ifthi:
Cash flow benefits: Only paying interest reduces monthly outgoings.
Can sometimes be lower than rental costs, making it attractive for investors or those with alternative repayment plans.

Q6: Why Aren’t Interest-Only Mortgages More Popular?
Ifthi:
Strict conditions from banks:
Large deposit
Credible repayment plan (pension, other properties)
Other assets like savings or ISAs are usually not considered credible repayment vehicles.
Historical controversies reduced popularity.

Q7: Do Endowment Policies Still Exist as a Repayment Option?
Ifthi:
Few policies remain from the past.
Not widely available for new mortgage applicants.
Currently, the main qualifying repayment vehicles are:
Pension plans
Existing buy-to-let properties with equity

Q8: Who Would You Recommend an Interest-Only Mortgage To?
Ifthi:
Generally not recommended for residential borrowers due to risk of debt in retirement.
Suitable for:
Experienced landlords
Individuals with pension pots or multiple income-generating properties
First preference: repayment mortgage for residential properties.

Closing Remarks

Gemma:
Always speak to an advisor if you’re unsure whether an interest-only mortgage is suitable.
Reminder: A mortgage is secured against your home or property and may be repossessed if repayments are missed.