What is an interest only mortgage?

fa-homebuyers ["Mortgages Explained"]
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At a glance:
You’ll need to hire a conveyancer when you buy a home, sell a home, transfer ownership or to grant the extension of a new lease. 
They will help you with the paperwork and legal stuff that needs to happen to transfer ownership of a home.
Your lender will use a conveyancer when you remortgage.

How does an interest only mortgage work?

You borrow the money to buy a home, but only pay back the interest.
The amount you pay each month may be lower than a repayment mortgage, because you aren’t repaying the money borrowed at the same time.
The amount you borrow won’t go down during the term of your mortgage.
You will need to repay the money borrowed for the home at the end of the term with a repayment strategy.

What can you use as a repayment strategy?

You will need to tell your lender about how you’ll pay off the money at the end of your mortgage term.

At the start and during the term, you’ll need to show them evidence of how you plan to do this.

There are lots of ways you can pay off an interest only mortgage:

Sale of the property 

You can sell the home at the end of the term to pay back what you is owed. There are rules around this:
This can be used to cover up to 60% of the value of the property. So, if you want to borrow more than 60% LTV, you will need to pay off the rest with another strategy.
Must have a minimum equity of £250,000 at the time of application for homes outside of London.
It must have an minimum equity of £300,000 for homes in London.

Sale of other UK property

You can also sell a home that isn’t one you’ve taken out an interest only mortgage to buy.
75% of the equity in the property can be used.
The home must be in the UK and has to be in your name/s only.
A copy of the latest mortgage statement must be given as evidence.

Pension Lump Sum

For defined contribution schemes and Self Invested Pension Plan (SIPP), a 60% tax-free lump sum (15% of total pension pot) can be used.
For defined benefit schemes,  maximum of 90% of the tax free lump sum can be used.
Your full mortgage term must take you beyond the age of 55 and your declared retirement age must be at or before the end of the term of the mortgage.
You will need your latest pension statement as evidence.

Savings

The current value of the savings must cover 100% of the amount you borrow.
The total can include eligible investments.
The savings must have been held for a minimum of 12 months. 
The savings must be in pounds sterling.
You will need your savings statement as evidence.

Existing endowments

The projected mid-point maturity value must cover 100% of the money you borrow.
The endowment must have been in place for at least 12 months. 
The end of the endowment term must not exceed end of mortgage term.
It must be a UK Policy provided by a regulated firm.
You will need the latest endowment policy statement from the last 12 months as evidence.

Investments

The current value of the investments must cover 100% of the money you borrow.
Can be a combination of investments and savings.
The investments must be in pounds sterling and been in place for a minimum of 12 months.
For a Stocks and Shares ISA, Unit Trusts/OEIC and Investment Bonds you will need a copy of the latest statement as evidence.
For a Stocks and Shares ISA you can also use certificates with evidence of share-holdings and their valuation.

Is an interest only mortgage right for you?

There is lots to think about before you take out an interest only mortgage.

Benefits of an interest only mortgage

Monthly repayments may be lower than if you were repaying the capital and interest at the same time.
It can free up cash during the term of your mortgage to use as you wish.

Considerations of an interest only mortgage

You need to be confident you can pay off what you owe at the end of your term.
You may pay more interest overall, as the amount you borrowed will not be going down.

Interest Only Morgages

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