Interest-Only Mortgage for First-Time Buyer

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Interest-Only Mortgage for First Time Buyer

Charlie Connolly talks to us about interest only mortgages for First Time Buyers. Podcast recorded in December 2024.

What is an interest only mortgage and are banks still offering interest only mortgages?

Interest only mortgages are where you only pay the interest on the amount you borrowed each month, and you don’t repay the amount borrowed itself.

The interest is charged on the full balance, and that balance doesn’t reduce. When the mortgage term ends, you’ll need to pay back the full mortgage amount in one lump sum.

Banks still offer interest-only mortgages at the time of recording this in December 2024. However there are a number of criteria that you need to meet to be eligible for this type of mortgage.

Can a First Time Buyer get an interest only mortgage?

It is possible for a First Time Buyer to get an interest-only mortgage, however, you are likely to need a large deposit of £150,000 or more, or you’re going to need a repayment vehicle that will cover the mortgage balance.

There may also be a restriction on the maximum Loan to Value. For example, some lenders may want you to have a minimum of 50% equity in the property.

Are interest only mortgages typical for First Time Buyers?

No, not really. Most First Time Buyers choose a capital repayment mortgage, which means the mortgage is repaid at the end of the mortgage term.

How do I know if an interest only mortgage is right for me?

This is something your mortgage advisor can give you guidance on after the fact-find stage. They will take your personal circumstances into account before giving you guidance on what type of mortgage might be right for you.

How much do I need to earn to get an interest-only mortgage as a First Time Buyer?

Some lenders would not expect a minimum income to obtain an interest only mortgage. However, some lenders do set minimum income requirements, where you would potentially have to earn £60,000 or more to fit their criteria.

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How do you calculate an interest-only mortgage payment?

This is quite easy. You multiply the loan amount by the annual interest rate, and then divide by 12.

For example, if your mortgage is £165,000 and your interest rate is 4%, that would equal £6,600. You then divide that figure by 12 – which is £550 per month.

What interest rate can I get as a First Time Buyer?

I wouldn’t like to say, because this can change from week to week. There are many factors that determine interest rates, such as swap rates, the base rate of England, how much deposit you are putting down and what type of deal you’re going for.

Is it hard to qualify for an interest-only mortgage as a First Time Buyer?

Yes, I would say so. As we’ve discussed, there are a number of criteria you would have to hit. It isn’t easy to obtain one, because they are riskier for lenders.

The balance of the mortgage has to be paid off at the end of the mortgage term, so there needs to be a repayment vehicle in place to ensure this happens.

How much deposit do you need for interest only or for an interest only mortgage?

This can vary from lender to lender again, but I would say that typically you’re going to need a deposit of around 25% for an interest only mortgage. However, some lenders would like a deposit of 40% to even 50% of the property value.

What are the pros and cons of an interest only mortgage? Is it worth doing one as a First Time Buyer?

The big positives are that you have lower monthly payments on interest only. You’re only paying the interest element. Lower monthly payments increases your cashflow, which means you potentially have more money for investment.

You could invest that money into savings accounts or a particular repayment vehicle that you would use later on to repay the interest only mortgage.

On the negative side, the mortgage balance isn’t shrinking, so you have to continue paying interest on the full amount. At the end of the mortgage term, you still owe the lender the initial amount you borrowed. There is also the risk that your repayment vehicle performs badly.

Interest only can be potentially better in the short term because it generally does reduce your monthly bills by a significant amount. However, you will pay for it in the long run, as it will likely add more to your total cost of the mortgage.

How can a mortgage broker help here?

With complex areas like interest only mortgages, you can really use a broker’s knowledge and expertise. We can guide you in the right direction and add value within the service we provide to you.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.