The toughness of interest-only eligibility criteria has waxed and waned for many years, usually in response to economic circumstances and the state of the property market.
This is because interest-only mortgages were originally designed to be sold alongside investment policies which were structured to look to repay the capital in full. Unfortunately, some of these policies and mortgages were arranged without due care or consideration to the risks, which meant some borrowers found themselves unable to repay the loan at the end of their term – a problem significantly compounded by the 2008 economic crash.
It is now no longer possible to bank on property price rises or endowment policies to cover capital repayment. This means that interest-only mortgages are considered to be a riskier proposition for mortgage providers, prompting many lenders to tighten up criteria around the credit crunch in 2008.
This meant it was much harder for consumers to access interest-only mortgages and some lenders no longer accepted the expectation of rising property prices as a valid repayment plan. To be approved, there were many more elements to criteria which had to be met and your repayment plan had to be regarded as much more watertight.
Today, rules, regulations and criteria surrounding interest-only mortgages are relaxing slightly. In recent months, some providers have raised the upper age limit for applicants, allowing individuals up to 70 years old to apply for an interest-only mortgage (although some lenders may still permit this over a longer term based on individual circumstances). Other providers have also begun to accept repayment plans based on the eventual sale of the property in some cases.
Loan-to-Value (LTV) Requirements
While a regular mortgage may allow you to put down a deposit as small as 5%, interest-only mortgages typically require you to have a much more substantial deposit. 50-60% loan to value (LTV) is a common requirement, which means your deposit/equity will need to cover 40-50% of the value of the property before you proceed. Split repayment methods are also now a possibility with some lenders giving slightly better scope in this area.
Proving Repayment Plans
Any applicant for an interest only mortgage will also need to have a clear, concrete plan to repay the capital of their property at the end of the interest-only mortgage term. There are a variety of circumstances which might make this possible, but you will need to provide clear evidence to prove that repayment is realistic. You may, for example:
- Be planning to sell the property and downsize
- Be expecting to receive an inheritance
- Be planning to sell the property and move in with relatives
- Be planning to sell another asset (for example, a buy to let property)
- Be expecting to relieve a significant bonus or an alternative windfall
- Have a repayment plan involving your pension, stocks, shares, investment bonds or an alternative investment vehicle
Whatever your circumstances, age or repayment plan, finding the best value interest-only mortgage means understanding the industry inside out. Contact our experienced team today for an inside view and to uncover ideal products for you. Get in touch now on 0800 114 3978.