How Much Can I Borrow on an Interest Only Mortgage?September 25th, 2013
An interest only mortgage is a type of mortgage where the capital remains constant and only the interest must be repaid, usually in monthly instalments. There are currently interest only mortgages like the Leeds Building Society retirement mortgage, or the Stonehaven Interest Select Plan. Each has a different set of rules. Some of these interest only mortgages have fixed terms requiring interest payments ending at a predetermined time in the future. Whereas some are an interest only lifetime mortgage with no term and only need repayment upon eventual sale of the property, be it death or moving into long term care.
Again, each scheme permits different borrowing allowances. Therefore, how much can be borrowed will depend on the type of mortgage, as they have different lending criteria.
On a fixed term interest only mortgage such as the Leeds, the interest on the loan is paid via monthly payments, and the capital sum is repaid when the mortgage closes and this must be prior to age 80. Such lenders will consider income, but mainly on the grounds of affordability and the ages of the applicants at application stage of the mortgage. The loan is calculated based on a multiple of the income(s); the multiple used will also be determined by the size of the income. For example the lower the income, the lower the income multiple given.
If one is still in employment while taking out the mortgage, proof of employment income is considered, and if retired, pension income, as well as income from any investments or rental and any other sources can be considered. In case of joint applicants, combined income is taken into consideration, and some retirement interest only mortgages also require a life assurance policy in order to lend – to ensure that the mortgage can be sustained in case one partner dies earlier. However, caution will always be exercised where the borrower starts the mortgage before they retire and take it into retirement. Here the lender must make sure that the mortgage will still be affordable once retirement is reached as the retirement income will undoubtedly be lower.
On an interest only lifetime mortgage, such as Stonehaven, the interest is still paid during the customer’s lifetime, but not for a specific term, for their lifetime. The maximum borrowing permitted with these mortgages is based on exactly the same as an equity release scheme – age and property value. Therefore, the older the applicant, the higher the loan-to-value will be and subsequently the loan.
For a mortgage that continues throughout one’s lifetime, the lending criteria and terms of calculating are slightly different. Currently interest only lifetime mortgages lenders do not consider income while lending as they class the interest only payments as a ‘contribution’ towards the interest charged.
There are online interest only mortgage calculators to work out how much you could borrow. Alternatively a professional mortgage specialist could help you calculate exactly how much you will be able to borrow on different mortgage types. Entering into a mortgage during retirement or before reaching retirement is a big decision and could have implications for the entire family. It is important that you get sound professional advice about which mortgage best suits your needs before making any commitments.
Interest only mortgages have come under pressure from the Financial Services Authority following the findings that thousands of homeowners across Britain have interest only mortgages without any means to repay them. However, interest only can be suitable depending on individual needs and usually where a repayment vehicle is in place.
There was a huge void in the market after the Halifax Retirement Home Plan interest only lifetime mortgage was withdrawn at short notice in August 2011. While Stonehaven is currently the only interest only lifetime mortgage available, new providers have committed to launch their schemes in the near future and we look forward to their launch.