Updated: March 02, 2022

First-Time Buyer Interest-Only Mortgages

Need an interest only mortgage as a first time buyer? They are available! Our expert guide tells you exactly what you need and how to get one.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: March 02, 2022

Although interest-only mortgages are less popular than they once were, in some circumstances they’re still an option for first-time buyers looking for an affordable way to get on the property ladder.

In this article we’ll look at why an interest only mortgage might be a good choice for you and take you through the three key stages in preparing your interest only mortgage application as a first time buyer. We’ll look at the eligibility requirements, what you’ll need in terms of a deposit and repayment vehicle and why a specialist mortgage broker is a must.

What are you looking for?

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

Yes, despite their decline in popularity of late, it’s still just about possible to get an interest only mortgage as a first time buyer. That said, we should caveat that by saying there are very few lenders willing to do it, so you may need a mortgage broker who has a specialist knowledge of the market to help you track down what you need.

Interest only mortgages were once seen by many as the golden mortgage option, but their popularity has dropped significantly in recent years and they are increasingly hard to secure if you’ve never owned a property before.

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Why choose this type of mortgage?

The main benefit of an interest-only mortgage for a first-time buyer is affordability. With an interest only mortgage you only have to pay off the interest each month, not the capital, so repayments are much lower. This can be a big help when you’re starting out on the property ladder as it keeps costs low, although you will need a repayment vehicle in place to settle the debt at the end of the term.

Starting out on an interest only mortgage doesn’t mean you’re stuck with it either, you can always switch to a repayment mortgage further down the line once you’re in a stronger financial position and can afford to pay more every month.

How to apply

If you’re considering an interest only mortgage as a first time buyer there are three important steps to take before you make your application.

Prepare your documentation

Getting all of your paperwork in order before you start can save a lot of time in the long run and sends a positive message to potential lenders.

You’ll need to gather recent bank statements, payslips or accounts or tax returns if you’re self-employed, along with proof of any other regular income and evidence of your repayment vehicle, which you’ll need to demonstrate to the lender that you’ll be able to settle the mortgage debt at the end of the term.

Think too about any other borrowing you have, as this will be considered. You’ll also need some formal ID such as a passport.

Check your credit reports

While you may think you have a good idea of your credit history, it’s worth checking your credit files with a credit agency just to make sure it’s accurate. Sometimes a check will show up an old debt you’ve forgotten about or even a mistake, so it’s best to know what you’re dealing with so that you can address any issues in advance.

Checking your files before you apply will give you the chance to challenge any inaccuracies on them and have outdated information removed.

Speak to a broker

Because there are only a few lenders who will consider interest only mortgages for first time buyers, this really is an instance when the support of a specialist broker is invaluable, both in finding a lender who has a suitable product and in putting together a strong application.

Eligibility criteria

Interest only mortgages are considered a risky proposition for first time buyers and so eligibility criteria can be strict. Most lenders have the following requirements…

Deposit and income needed

Most of the lenders who are prepared to consider an interest only mortgage for first time buyers are looking for a minimum of 25% deposit and a regular annual income of at least £50,000. On top of this they’ll want evidence of a watertight repayment plan.

Repayment vehicles

A repayment vehicle sounds complex, but basically it’s just the plan you put in place to show you’ll be able to pay off the capital on your loan at the end of the mortgage term. With an interest only mortgage you’re only paying the interest, so on a £200,000 mortgage over 25 years for example, you’ll need a way to pay back the £200,000 in 25 years time.

There are a few ways of doing this, and different lenders may have different requirements. Typically you’re looking at savings and investments, so things like stocks and shares, ISAs, pensions or saleable assets like another property.

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

Although it might seem counterintuitive, you’re probably more likely to get an interest only mortgage as a first time buyer on a buy-to-let property than on a home for yourself. This is because interest only mortgages are more the norm in the buy-to-let market and so are more widely accepted.

That said, it doesn’t mean it will be plain sailing. Most lenders do prefer some landlord experience, and you’ll still need a good deposit and a steady income so that you can cover any periods when you don’t have tenants. If this is a route you’re keen on then we can match you with a broker who specialises in interest only buy-to-let mortgages for first time buyers.

Potential alternatives to consider

If you’re looking at an interest only mortgage simply because you need the lower monthly repayments, there are a couple of alternative options.

Repayment mortgages over a longer term

While the monthly payments on a standard repayment mortgage are much higher than an interest only mortgage, one way to reduce them is to take your mortgage out over a long term. In the past a standard mortgage term has been 25 years, but there are plenty of lenders nowadays who are happy to extend the term to 30 years, 35 years or even 40 years in a few cases.

Remember you can always request to reduce the term at a later date if you remortgage and your circumstances change, or you can reduce the term by making overpayments when you can afford them.

Part-and-part mortgages

Another option is a part-and-part mortgage which, as the name suggests, is a hybrid of a repayment and an interest only mortgage. Every month you’ll pay off the interest, but you’ll also pay something towards the capital, so the lump sum at the end won’t be as much. Monthly repayments are smaller than a standard repayment mortgage so this kind of mortgage can often be an affordable compromise.

Get matched with an interest only mortgage broker

Getting an interest-only mortgage is difficult if you’re a first-time buyer, but there’s a way you can tip the odds in your favour: apply through a broker who specialises in arranging interest-only mortgages for first-time buyers.

They have the knowledge and experience you need and can make sure that you end up with the best deal, the ideal lender for you and the right advice on repayment vehicles so that you minimise risk and maximise affordability.

Our broker matching service is completely free, and we can match you with a who-of-market broker who has specialist expertise in interest only mortgages for first time buyers, so give us a call on 0808 189 0463 or make an enquiry to start the process today.

FAQs

Can you get an interest-only mortgage with the Help to Buy scheme?

No, the Help to Buy scheme only applies for repayment mortgages, so you won’t be able to take advantage of the incentive if you want an interest only mortgage. There may be other offers you’re eligible for however, so get in touch and we can put you in touch with one of the advisors we work with.

How popular are these mortgages among first-time buyers?

As you may have gathered, there is really very little appetite among lenders for agreeing interest only mortgages for first time buyers, so you’ll need to do your homework and a lot of shopping around. Better yet, let us match you with one of the advisors we work with, free of charge, and have them do the homework for you.

Why are they more difficult to get now?

Interest only mortgages have always been riskier than repayment mortgages, but the financial crisis of 2007-08 was a stark reminder for many people of just how much riskier. The introduction of tighter regulations around interest only lending and tougher controls and checks mean that the administration of interest only mortgages is now more complex, and this coupled with higher levels of risk makes them a far less attractive proposition for lenders.

For first time buyers without the financial history and security of homeowners, it’s even less appealing.

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We can help! We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Interest Only Mortgages Ask us a question and we'll get the best expert to help.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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