Introduction
We recently helped our customer arrange an interest-only mortgage to purchase a property in Petersfield, Hampshire, following a divorce.
Our customer wanted to purchase a new main residence using funds from being bought out of their previous home, alongside personal savings. However, ongoing divorce settlement negotiations meant that some of the deposit funds and supporting evidence were not yet available.
The challenge was finding a lender that could accommodate an interest-only mortgage with a downsizing repayment strategy while allowing the application to progress despite the outstanding deposit documentation.
We secured approval for a five-year fixed-rate interest-only mortgage with Nationwide over a 15-year term.
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The Scenario
Our customer was moving home following a relationship breakdown and needed to arrange a mortgage in their sole name.
Their former partner was buying out their share of the previous property, with the proceeds forming a substantial part of the deposit for their new purchase.
The property being purchased was in Petersfield, with a mortgage requirement of under £350,000, representing approximately 45% of the property’s value.
Our customer was employed, receiving a substantial basic salary alongside a guaranteed bonus. Their income was sufficient to support the proposed borrowing, but they had specific requirements regarding the mortgage structure.
Rather than taking a standard capital repayment mortgage, our customer wanted an interest-only arrangement over 15 years.
Their intention was to sell the property and downsize at the end of the mortgage term, using the sale proceeds to repay the outstanding mortgage balance.
They also preferred a five-year fixed rate to provide certainty over their initial mortgage interest payments.
The Challenge
There were two main challenges: securing an interest-only mortgage with an acceptable repayment strategy and progressing the application while the divorce settlement was still being finalised.
Meeting interest-only mortgage criteria
Residential interest-only mortgages have additional lending requirements because the mortgage balance does not automatically reduce through the regular monthly payments.
Lenders therefore need to be satisfied that the customer has a credible strategy for repaying the capital at the end of the mortgage term.
In this case, our customer intended to sell the property and purchase a smaller home using the remaining equity.
We needed to identify a lender willing to consider this downsizing strategy alongside the proposed mortgage amount, loan-to-value and 15-year term.
The customer’s employed income, including their guaranteed bonus, also needed to support the lender’s affordability assessment.
Delays with the divorce buyout and deposit
The second challenge involved the timing of the deposit.
A significant proportion of the funds was due to come from our customer’s former partner buying out their share of the previous home.
However, the settlement arrangements were still being negotiated, and the formal evidence required to demonstrate the deposit was not fully available.
This created a potential problem when submitting the mortgage application.
Lenders need to establish where deposit funds are coming from and may require supporting evidence before progressing an application.
We therefore needed to establish whether the lender would allow the mortgage application to proceed while the remaining documentation was being finalised.
Without this flexibility, our customer risked delays that could have affected their proposed property purchase.
What We Did
We began by reviewing our customer’s financial circumstances, borrowing requirements and proposed interest-only repayment strategy.
Our affordability assessment considered their employed income, including the guaranteed bonus, alongside their existing financial commitments and the proposed mortgage term.
We then researched lenders across the market to identify those able to consider a residential interest-only purchase using the future sale of the property as the repayment strategy.
This involved checking the relevant lending criteria, including the maximum mortgage term and requirements surrounding the proposed downsizing arrangement.
Nationwide emerged as a suitable option, offering a mortgage structure that met our customer’s requirements.
However, before placing the case, we contacted the lender’s Business Development Manager (BDM) and discussed the circumstances with the lender.
We explained that the deposit was coming partly from a divorce buyout and that some of the formal supporting evidence remained outstanding.
Rather than submitting the application without first addressing this issue, we sought clarification on how Nationwide would approach the deposit verification requirements.
We worked directly with the underwriting team, enabling the application to progress while the outstanding deposit details were being finalised.
Alongside this, we gathered the supporting documentation required for the mortgage assessment, including payslips, evidence of bonus income, bank statements and information relating to the divorce buyout.
We also maintained communication and coordination within our team, including during periods of annual leave, to ensure the application continued progressing.
The important part of our involvement was establishing the lender’s position on the deposit evidence before it became an obstacle to the application.
The Solution
We recommended a five-year fixed-rate interest-only mortgage with Nationwide over a 15-year term.
The mortgage was structured at approximately 45% loan-to-value, with the proposed repayment strategy based on selling the property and downsizing at the end of the term.
The interest-only arrangement meant our customer’s regular mortgage payments would cover the interest rather than automatically reducing the outstanding capital.
The five-year fixed rate provided stability over the mortgage interest rate during the initial period, while the product also included an overpayment facility.
Importantly, Nationwide was able to progress the application despite the temporary delay in obtaining all the formal deposit evidence associated with the divorce settlement.
Why This Solution Worked
Nationwide was suitable because the lender could accommodate the combination of requirements involved in this purchase.
The customer’s income and borrowing position supported the affordability assessment, while the proposed downsizing strategy met the lender’s requirements for the interest-only arrangement.
The 15-year term also aligned with the mortgage structure being sought.
Just as importantly, our discussions with the BDM and underwriting team helped establish how the application could proceed while the outstanding deposit documentation was being finalised.
This meant the mortgage application did not have to remain on hold solely because of the timing of the divorce buyout evidence.
The Result
We successfully obtained an Agreement in Principle and subsequently secured approval of the full mortgage application with Nationwide.
The approved mortgage provided the interest-only structure, 15-year term and five-year fixed rate our customer required.
By discussing the deposit arrangements with the lender in advance and working with the underwriting team, we were able to keep the application progressing despite the outstanding divorce settlement documentation.
This allowed our customer to move forward with their plans to purchase a property in Petersfield.
What This Case Shows
This case demonstrates how the timing of a property settlement following divorce can affect a mortgage application, even where the customer’s income and borrowing requirements are otherwise straightforward.
Deposit verification can be particularly important when funds are being released through a buyout of a jointly owned property.
It also highlights the importance of checking interest-only repayment strategies against individual lender requirements.
Selling a property and downsizing may be an acceptable repayment strategy with some lenders, but eligibility depends on the customer’s circumstances, the proposed borrowing and whether the strategy satisfies the lender’s criteria.
In this case, speaking to the lender before submission helped us establish a workable approach to the outstanding deposit evidence.
Need Help with an Interest-Only Mortgage?
If you’re considering an interest-only mortgage, purchasing a property following a separation or experiencing delays with deposit funds, Kerr & Watson can review your circumstances and explain the available options.
We provide independent, whole-of-market mortgage advice in Petersfield and the surrounding areas.
Contact Kerr & Watson to discuss your mortgage requirements.
