Several UK mortgage lenders have started enhancing their interest only criteria with some great new positive changes, making life much easier for borrowers and brokers alike. When getting a new mortgage, it has traditionally been a default setting (so to speak) to chose a capital repayment mortgage for perceived ‘ease’ and the obvious ability to pay down the balance of your loan. But in a tough market of high interest rates and expensive mortgage payments, any lender making improvements to alternative mortgage payments is definitely a plus.
Interest Only Criteria Mortgages
Historically interest only mortgages have had a bad rap with borrowers as you don’t actually pay back any of the capital of the mortgage loan if your deal is purely interest only. This can mean that if you don’t have a plan in place to pay back the loan, you could be left with a bit of a shock when your mortgage term eventually ends and you owe the bank hundreds of thousands of pounds! However, interest only mortgage have a lot of benefits.
The usual borrower who benefits from interest only mortgages is buy-to-let landlords. As you are only paying the interest off of the mortgage per month, the monthly payment is much lower than if you were to pay capital and interest off e.g.
£250,000 mortgage over 25 years at a rate of 4%:
Capital and repayment = £1,320 per month
Interest only = £833 per month
A landlord can then make a profit by charging their rent and paying less per month on their mortgage i.e. £2,000 per month rent – £833 mortgage = £1,167 profit.
However, residential borrowers can also sometimes benefit from interest only mortgages or at least part interest only part repayment loans. Opting for these routes could help you to keep your commitments down, especially if you have large loans or are conscious about rising interest rates. But, in the past it has been much more difficult for residential borrowers to get these types of mortgages and lender criteria has been quite strict. However it seems that a lot of lenders are making some very positive changes to their interest only criteria.
Lender Changes To Interest Only Rules
In a couple of messages to all subscribing mortgage brokers, a couple of big lenders have announced changes to their interest only lending rules, specifically acceptable repayment vehicles when interest only mortgages come to an end and minimum income requirements. Here are the changes announced:
Two new repayment vehicles will be added to Accord’s list of acceptable repayment strategies, with an increase to the maximum LTV for sale of mortgaged property, and Part and Part lending. They’re also increasing the minimum equity requirement for sale of mortgaged property.
- Addition of acceptable repayment strategies for Interest Only clients
- Use of pension lump sum
- Sale of other UK property.
Criteria for use of pension lump sum:
- Maximum of 60% of tax-free lump sum or 15% of pension pot for defined contribution or SIPPs
- Maximum of 90% of tax-free lump sums for defined benefit schemes where the mortgage term ends after the applicant becomes 55 and is eligible to receive a pension lump sum
- Evidence required – Pension statement dated within the last 12 months.
Criteria for sale of other property:
- UK property only
- Owned by our applicant(s) in personal names with no other parties named on the property
- Maximum of 75% of equity can be utilised as a repayment strategy from the property.
- Changes to ‘sale of mortgaged property’ criteria:
- Increase to the maximum LTV for ‘sale of mortgaged property’ from 50% to 60%
- Increase to the minimum equity requirement for ‘sale of mortgaged property’ from £200k to £250k (£300k if in London postcodes).
- Increasing max LTV for clients using Part and Part lending
- Max LTV will rise from 75% to 85%
- Interest Only element maximum remains 75% LTV, 60% for sale of mortgage property.
On Wednesday 24 May, we’re reducing the qualifying income required for Sale of Mortgaged Property (SOMP), bonus and cash repayment plans. We are also making changes to some SOMP criteria, which will mean this option is now available to more customers.
For SOMP (including where 2nd home), bonus and cash repayment plans
Minimum income reduced to:
- £75,000 for a sole applicant (or one applicant on joint application)
- £100,000 for combined income on a joint application.
Sale of Mortgaged Property (SOMP)
- The maximum loan to value (LTV) available on Interest Only with SOMP is being increased from 50% to 75%
- For part Interest Only and part repayment lending the minimum equity will now be calculated at the end of the mortgage term, not at point of application.
New limits are now:
- 0% to 50% – minimum equity at the end of mortgage £300,000
- >50% – 60% – minimum equity at the end of mortgage £500,000
- >60% – 75% – minimum equity at the end of mortgage £750,000.
For a property value of £500,000 a loan of £375,000 (75% LTV) would now be available with up to £200,000 on SOMP (to leave £300,000 minimum equity at end of term).
- You will receive a new message where SOMP has been selected but the minimum equity requirement has not been met.
- All other SOMP criteria remains unchanged.
What Mortgage Brokers Say About Interest Only Criteria Changes
These are such good extensions to these lender’s current criteria. But, it is also very important to note that interest only mortgages on residential homes are generally only available to those with higher incomes and higher equity. For the average first time buyer or those buying smaller value properties, it is not normally available to them. If this is an option that you think might work for you or someone you know, it is important to be cautious and to review your repayment strategies regularly with a professional mortgage advisor.
Call our interest only mortgage experts today. Our initial mortgage consultation is free of charge and can be done within 10 minutes for you. We are here to help.