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UK MORTGAGE CENTRE

Can a first-time buyer get an interest-only mortgage?

February 20, 2024

Keen to obtain a first-time buyer interest-only mortgage?

Before you start reaching out to lenders with attractive interest-only mortgage deals, it’s important to weigh the pros and cons of opting for this type of mortgage as a first-time buyer.

Fortunately, the team of approachable and knowledgeable mortgage advisors at UKMC is on hand to support first-time buyers with any interest-only mortgage queries they might have.

From how interest-only mortgages work and who is eligible to apply to how much they cost, we explain all below.

What is an interest only mortgage?

As the name suggests, an interest-only mortgage refers to a type of mortgage where the borrower repays only the interest charges on the loan.

This means the borrower’s monthly mortgage repayments will not go towards paying any of the original capital borrowed from the lender.

The entire loan will still need to be repaid by the end of the term – the maximum term for interest-only mortgages is typically 25 years.

This is unlike a traditional repayment mortgage where the borrower pays part of the interest and part of the capital off the loan (mortgage) each month.

Not only that, unlike interest only mortgages, repayment mortgages tend to come with a more generous repayment period of up to 40 years.

How does an interest-only mortgage work?

As the borrower will only be paying the interest on the mortgage loan, the monthly repayments are significantly smaller than those of a traditional mortgage loan.

This gives the borrower greater cash flow and more financial freedom.

However, it’s important to bear in mind that these monthly payments won’t reduce the size of the loan and a 25 to 40 percent deposit is often required for an interest-only mortgage.

Instead, these payments will simply cover the interest to prevent the original sum of the mortgage loan from growing any bigger.

As a result, at the end of the loan period, the borrower will still be required to pay back, in full, the original loan amount.

By way of illustrating, if a borrower obtained an interest-only mortgage for £150,000 over a 25-year period, they would still owe £150,000 at the end of this period.

Instead, their monthly repayments would cover the interest on the loan amount only, preventing the size of the loan from growing.

At the end of this loan period, the borrower must repay the loan by either selling the property, digging into their savings, or remortgaging.

Who is eligible for an interest-only mortgage?

While traditional repayment mortgages are the most common arrangement for prospective and existing homeowners in the UK, other deals like interest-only mortgages are available for eligible individuals.

So, who can apply for an interest-only mortgage and, more importantly, can first-time buyers get an interest-only mortgage? Put simply, yes, anyone can apply for an interest-only mortgage – including first time buyers.

However, this doesn’t mean anyone will be accepted for this type of loan. This is because mortgage lenders (banks and building societies) have their own criteria for determining which individuals are eligible for their mortgage deals.

Typically, high-income individuals (earning at least £75,000 a year as a sole applicant or £100,000 as joint applicants) will meet this stricter lending criteria. This is because lenders need to be confident that the borrower can repay the original loan amount at the end of the mortgage period.

It’s for this reason that interest-only mortgages are commonly taken out by landlords purchasing buy-to-let (BTL) properties. While interest-only mortgages are common among landlords and other high-income individuals, can a first-time buyer get an interest-only mortgage if they wanted one?

Yes, first-time buyers can obtain an interest-only mortgage. However, specialist lenders may be their only option as fewer lenders are willing to offer this type of mortgage to individuals looking to buy their first home.

How much is an interest-only mortgage?

Working out how much an interest-only mortgage is likely to cost you is relatively simple – all you need to know is the size of the loan and the interest on this amount.

For example, if you contacted a lender to borrow £150,000 and interest on this sum is 3%, then the annual interest on this mortgage deal would be £4,500. This would mean your monthly mortgage repayments would be £375.

Over a 25-year mortgage repayment period, this means the total amount of interest you pay will be £112,500.

You’ll then be required to pay the £150,000 of the original loan at the end of this period, meaning £262,500 would be the overall cost of obtaining this property using an interest-only mortgage.

What happens at the end of an interest only mortgage?

As mentioned above, at the end of interest-only mortgage, you will need to repay the original loan amount.

As a result, this type of mortgage isn’t a common choice for first-time buyers as they tend not to have enough savings or have a high enough income to repay the entire loan at the end of this period.

However, if you’re keen to become an interest-only mortgage first-time buyer and want more advice about this arrangement, feel free to contact the expert mortgage advisors at UKMC.

Secure your first mortgage with UKMC advisors

Regardless of whether you’re interested in an interest-only or no-deposit mortgages, it pays to understand the pros and cons of all your borrowing options as a first-time buyer.

Fortunately, the team of expert mortgage advisors here at UKMC has years of experience helping first-time buyers to secure the best mortgage deal to suit their specific requirements.

At UKMC, our knowledgeable mortgage advisors can help you to source the best mortgage lender deals by discussing your eligibility for certain first-time buyer government schemes and benefits. Once you understand all your options, we can help you to make a more informed decision.

If you’d like to learn more about becoming an interest-only mortgage first-time buyer or have another question regarding any part of the entire property-purchasing process, don’t hesitate to contact our friendly, expert team of mortgage advisors.

For more information or to book your appointment with one of our experienced mortgage advisors, you can either give us a call on 01925 573328. Alternatively, you can book your appointment directly here.

UK Mortgage Centre is a Trading Style of The UK Mortgage Centre Group. The UK Mortgage Centre Group is authorised and regulated by the Financial Conduct Authority – FRN 826982. Registered in England & Wales: 11614569. As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments. The Financial Conduct Authority does not regulate some forms of buy-to-let mortgages. The Financial Conduct Authority does not regulate will writing and taxation and trust advice.