Interest-Only Mortgage for First Time Buyer

What is an interest-only mortgage?

It’s a mortgage where you only pay the interest. For example, if you had a 25 year term, at the end the mortgage balance is still left there. You wouldn’t have paid any capital off.

You’re just paying the interest and no capital. With a £250,000 mortgage, for example, 25 years later, you’ll still have a £250,000 debt.

Can a First Time Buyer get an interest only mortgage?

They can, but the criteria on interest only mortgages are very tight in terms of deposit or the equity in the property. How you plan to repay the mortgage at the end of the term is also key. Interest only is pretty common on Buy to Let, but much less so with residential mortgages.

Are interest only mortgages typical for First Time Buyers?

No, because most First Time Buyers want to start paying their mortgage balance off – not just the interest on it. They do exist, but they’re not very common.

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

With interest only, we would look at the whole situation – because it’s our job to figure out whether this is right for you. We would see what position you are in, as every situation is different. We need to look at the whole thing and advise you in the right way.

How much do I need to earn to get an interest only mortgage?

Interest only criteria is pretty tight. A lot of lenders need you to earn at least £75,000 or £100,000 – or sometimes even more than that. But a couple of lenders don’t require a certain income level.

It would still need to fit on the income multiples though, as with a normal capital repayment mortgage. That’s always required to reach the borrowing you want to achieve. Lenders that don’t have a minimum income will have other criteria, so we’d sit down and have a chat with you about the requirements.

How do you calculate an interest only mortgage payment?

All you do is you multiply the loan amount by the annual interest rate, and then divide that by 12. That gives you the monthly payment.

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

At present, on the 21st of January 2025, rates are mainly in the 4% range, but when you get up to the 90% Loan to Value category and above, this creeps up over 5%.

You wouldn’t get an interest-only mortgage at 90% and above, anyway. It has to be a lot lower than that.

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

Yes, it’s more involved than capital repayment because the circumstances are different. Income levels generally need to be quite high, but we have access to a couple of lenders where that’s not a factor.

There needs to be a repayment vehicle in place with all interest only mortgages. This is for regulatory purposes with the Financial Conduct Authority (FCA). The repayment vehicle is essentially how you’d pay the mortgage back at the end of the term. It could be the sale of the property and downsizing, or an ISA or pension in the background. You also need a larger deposit.