Rules are becoming tighter on interest-only mortgages
It is still possible but mortgage lenders’ criteria has been steadily tightening and most began to typically impose a maximum borrowing level of 75 per cent of the property value.
More recently this has been reduced to 50 per cent with high street lenders such as Halifax and Santander.
Lenders want to know that there are funds to repay the loan if you have an interest-only mortgage; and the sale of the mortgaged property will not be allowable in the majority of cases.
However, there is a certain lender who will allow this. Their requirements for the sale of the property to be acceptable are there must be a minimum of £150,000 equity difference between the mortgage amount and the value of the property – and a maximum loan to value of 66 per cent LTV.
Other options allowable will be related to ISA’S, but stocks and shares rather than cash ISA’S. This is because of the liquidity of the cash ISA and ready access to the “fund” earmarked for mortgage repayment by the borrower. Pension funds are also allowable, but again various limits from individual lenders and minimum requirements of the fund will be applicable.
The simple fact is the days of an interest-only mortgage for a cheaper monthly repayment on a bigger mortgage are going to be a thing of the past for the majority of people.
Buying to let isn’t simply a case of finding a tenant and cashing in on the rent. There are legal requirements and tax implications to take into consideration; which may prove quite complicated to the uninitiated.
Speaking to a good letting agent should help with the basic understanding of the pros and cons of letting a property. My advice would be to speak to an independent mortgage broker about mortgage funding and an accountant and solicitor about any legal or tax implications. There will be more on the specifics of future implications at a later date.
One positive aspect to the buyto-let mortgage is that lenders are happy to lend on an interest only basis as opposed to the residential mortgage market.
It can be quite hard to understand certain terms and unfortunately these aren’t the only technical terms used when applying for a mortgage.
Ability to Pay, also referred to as Affordability Assessment, is a way of working out how much you may be able to borrow. This is the lender’s way of determining how much you can afford to pay. Don’t be fooled with the calculation of three or four times your salary as a rule of thumb. This is largely a thing of the past now.
Agreement in Principle doesn’t mean you have your mortgage. This is simply a means to give the lender permission to conduct a credit search and apply a credit score against you. Most lenders rely on this risk-profiling to complete an affordability assessment based on income figures declared.
At this point, for a lender to decide if they could lend, they do not need any documentation relating to employment, property or legal correspondence. This is why it is termed an Agreement in Principle, it does not guarantee final acceptance.
Having an Agreement in Principle is always recommended when approaching an estate agent. It avoids the equivalent in the second-hand car trade of customers known as tyre kickers and demonstrates that any would-be buyer is serious and able to obtain the finance they need to buy a property.