An interest-only mortgage can be hard to find. It is a niche product best suited for borrowers with strong cash flow, good credit and often for those looking for a short-term loan, typically from five to seven years. 50+ mortgage lenders reviewed and rated by our team of experts.
Interest only mortgages are available for home buyers, although they're not as common as repayment mortgages. To get one, you'll need a plan in place to repay what you owe when the mortgage ends. As with any other mortgage, whether you're approved is at the lender's discretion.
Yes. Interest-only repayments are available on fixed rate loans.
If your lender agrees, you can often change your repayment mortgage to an interest-only mortgage. To initiate this switch, reaching out to your lender is the first step.
While an interest-only loan may sound appealing for people looking to keep their payments low, it can be more difficult to get approved and is typically more accessible for people with significant savings, high credit scores and a low debt-to-income ratio.
Whether it's a good idea to change your repayment mortgage to interest-only depends on your individual situation. If you're looking to pay less each month, then switching to interest-only can help you free up some cash from your paycheck to go towards other things.
To qualify for an interest-only mortgage loan, you'll likely need: A credit score above 700. A debt-to-income (DTI) ratio below 36% A down payment of at least 15% (depending on the lender)
It might be more difficult to get accepted for an interest-only mortgage, as they're often viewed as higher risk. If you get to the end of your term and your repayment vehicle hasn't performed and doesn't cover the lump sum, you'll either need to sell your home or find another way to repay.
An interest-only loan may be a viable option for borrowers in certain situations, such as: Borrowers with non-traditional income: Buyers who rely on commission or bonuses may want to have a lower monthly payment and then pay on the principal when they receive their additional income.
👎 Drawbacks of Interest-Only Mortgages
With interest-only, you're only paying to borrow, not own. So, unless the market adds value to your home, you won't be building any equity. If prices drop, you could even end up owing more than your home's worth – a bit like paying rent but with a big bill waiting at the end!
You can borrow up to 85% loan to value (LTV) on a Capital Repayment basis. But only 75% can be on an Interest Only basis by using an additional repayment strategy.
Usually, interest-only loans are structured as a particular type of adjustable-rate mortgage (ARM), known as an interest-only ARM. You pay just the interest, at a fixed rate, for a certain number of years, known as the introductory period.
It can still be possible to get cheap rates with a higher LTV. For example, the best interest-only mortgages available right now (April 2023) for 75% LTV comes with initial interest rates as low as 3.99% (4.1% APRC). And even with an 80% LTV, there are still mortgage deals to be found for similar rates.
In fact, it is fair to say that not all lenders offer interest-only mortgages. But those that do will have strict criteria, such as a decent deposit and an approved repayment vehicle in place. This will act as some sort of security to pay off the capital at the end of the term.
In many markets, Wells Fargo — one of the largest in the mortgage industry — continues to originate interest-only loans (as well as other nonconforming mortgages) as it did before the pandemic hit the U.S., a spokesman said.
Typically, lenders offer up to 75% of the property's value for an interest-only mortgage. This means that you'll need a deposit of at least 25%. As interest-only mortgages pose more of a risk for lenders than repayment mortgages, many lenders ask for a much higher deposit, such as 40% or 50%.
You could apply to your current lender and request to switch your current deal to interest only. Many lenders will consider a switch to interest only, especially if this will assist borrowers facing difficulty with their immediate monthly outgoings.
Fewer lenders offer them, and banks have set stricter requirements to qualify. Banks generally only offer an interest-only mortgage to a well-qualified borrower. You'll likely need: A credit score of 700 or more.
To qualify for an interest-only loan, you'll need: Proof of income, such as pay stubs and bank statements. The ability to handle larger payments once the initial interest-only period ends. A higher down payment, typically at least 15%, though this can vary.
Many lenders have strict interest-only mortgage criteria for residential properties, such as having a high income, a good credit score, or a large home deposit. However, you're less likely to qualify for an interest-only residential mortgage if you're a first-time buyer or in a lower income bracket.
A balloon payment on a mortgage is a large, one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment is due, but you could owe a big amount at the end of your loan.
No Equity Growth: Interest-only mortgages generally require large down payments, so lenders have collateral against default. But for the first 5-to-10 years, the homeowner's equity doesn't grow at all, unless you make extra payments. If your goal is paying down a mortgage, interest-only loans are a bad place to start.
There are several different ways they could extend your mortgage, including: turning all or part of it into a repayment mortgage, with a later agreed full repayment date. letting you repay it with several agreed payments rather than just one lump sum.
A typical interest only mortgage lasts between five and 25 years. It's possible to remortgage to a new deal at any time, which is often a good idea if interest rates have changed. You can also remortgage at the end of the deal – but you will need to meet affordability criteria.