Interest only mortgages and downsizing

amnteam — Mon, 28 Nov 2016 12:26:51 +0000

Do you need interest only mortgage lending?
Is your property your only major asset?
Are you looking to downsize your home at a later date?
Would you like to save £900 a month on your cash flow?*

*Example £200,000 lending over 15 years monthly mortgage payment capital repayment v interest only

Interest Only Lenders (sale of mortgage property as repayment vehicle)

These Lenders allow sale of mortgage property as an acceptable capital repayment vehicle within certain conditions

Lender	Max LTV	Minimum Equity	Minimum Income
Barclays	50% or 75% part and part	£300,000	£75,000 at least one applicant	Apply Now
Halifax	50% or 75% part and part	£200,000	£100,000 single £150,000 joint	Apply Now
Leeds BS	60%	to suit downsizing	none	Apply Now
Nat West	50% or 75% part and part	£200,000	£75,000 at least one applicant	Apply Now
Santander	50% or 75% part and part	£150,000	£50,000 single £70,000 joint	Apply Now

More important details on interest only mortgage applications below

Minimum Equity

Many lenders offering interest-only mortgages today have a minimum equity requirement where the sale of mortgage property is to be the repayment vehicle.

This means that the equity in the property on purchase (in other words the market value less the mortgage total) needs to meet a minimum figure, typically £200,000 or £300,000.

This requirement is impractical for many properties outside of the south-east of the country.

The theory is that sufficient equity allows the borrower to ‘downsize’ at a later date selling their home and buying a less expensive one elsewhere with the equity released.

Maximum loan-to-value

Where an interest-only mortgage agreement is used, lenders limit the loan-to-value of the mortgage. Typically, a lender will advance up to 50% of the property value on an interest-only basis.

Where the borrower wishes to borrow more than 50%, the rest of the lending will need to be taken on what is known as a ‘part and part’ basis. In these cases, the maximum loan-to-value is likely to be 75% loan-to-value.

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Part and Part mortgage lending

Part and Part lending is an arrangement whereby an element of your mortgage is on an interest-only basis, the balance being on a capital repayment basis.

For example, you may have 50% of your property value on an interest-only mortgage, the balance on a capital repayment basis.

Minimum incomes

It is common today for lenders to request that borrowers have a minimum personal income in order to obtain interest-only lending.
These limits vary, but are typically well above average income, for example, perhaps £75,000 or £100,000.

This makes interest-only lending unobtainable for the majority of the population.

Maximum income multiples

Whilst all residential mortgages are subject to full affordability calculations, mortgages with an interest-only element are often subject to maximum income multiples.

This means that the mortgage lender sets a maximum lending based on the client’s income. Example typical income multiple may be 4.5 times gross income.

Interest only – Repayment vehicles

One of the key factors in requesting an interest-only mortgage is notifying the lender of your intended vehicle to cover the capital and the mortgage term.

Various investments can be considered as repayment vehicles including:

ISA’s and PEPs
Shares
Sale of property
Pensions

Other ‘investments’ that mortgage borrowers may consider repaying capital include:

Sale of a business
Inheritance

Although sometimes very valid and practical capital repayment methods, the sale of a business and receipt of inheritance are not something that lenders feel borrowers can rely on to repay capital. These options are therefore excluded from valid repayment options.

Also excluded for similar reasons are regular overpayments and overpayments from bonuses.

Each of the acceptable capital repayment vehicles each has its own peculiarity.

ISA’s, PEP’s and Shares

This type of pooled investment has been used as a mortgage repayment vehicle over many years. The difference in recent years is that lenders are not keen on relying on investment return to meet the capital repayment figure. Therefore, is typical for a mortgage lender to ask that cases can only be supported by ISA’s and PEPs that are already at the value of the underlying mortgage. Clearly impractical.

Sale of other property

Using the sale of other property to repay your mortgage capital is possible.

For example, a mortgage borrower borrowing against a new home with a buy-to-let in the background can use the buy-to-let equity as the capital repayment vehicle (given certain circumstances).

Pensions

When a pension is used as a capital repayment vehicle, only the tax-free cash can be considered. As this is typically 25% of the total pension fund, an extremely large fund is needed for all but the most modest of mortgages.

Recently reduced limits on pension contributions make capital repayment via a pension highly impractical.

Existing interest-only mortgages

Borrowers with existing interest-only mortgages will have set these up based on the Lender’s criteria at the time of application. There is no obligation on the borrower to change their repayment structure during the mortgage term even if the lenders interest only criteria has changed. Some lenders do however limit options in terms of rate switching, additional lending, and/or change of mortgage term where borrowers have an interest-only element.

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