First Time Buyer Interest Only Mortgages

Can First-Time Buyers Get an Interest-Only Mortgage?

Yes, it is possible to get an interest-only mortgage as a first-time buyer in the UK, although fewer lenders offer this option compared with standard repayment mortgages.

Some lenders accept first-time buyers on an interest-only basis, subject to their income, deposit, affordability and repayment strategy requirements. Others do not allow first-time buyers to apply for interest-only mortgages at all.

With an interest-only mortgage, your regular monthly payments cover the interest charged on the loan rather than reducing the amount borrowed. You must therefore have a credible plan for repaying the outstanding mortgage balance, usually at the end of the term.

At Kerr & Watson, we help first-time buyers understand whether interest-only borrowing could be suitable, which lenders may consider their circumstances and how it compares with a capital repayment mortgage.

What is an Interest-Only Mortgage?

An interest-only mortgage is structured differently from a typical repayment mortgage. With this arrangement, you only pay the interest on the loan each month, which makes the monthly payments significantly lower.

However, unlike a repayment mortgage, you don’t reduce the loan’s principal amount over time. By the end of the mortgage term, you’ll still owe the original amount borrowed, which must be repaid in full.

How Does an Interest-Only Mortgage Work for First-Time Buyers?

With an interest-only mortgage, your regular monthly payments cover the interest charged on the loan rather than reducing the amount borrowed.

This means your scheduled monthly payments are lower than those on an equivalent capital repayment mortgage with the same interest rate and term. However, you will still owe the outstanding mortgage balance at the end of the term.

For example, if you borrow £200,000 on an interest-only basis, you would still owe £200,000 at the end of the mortgage term unless you had made additional capital repayments.

With a repayment mortgage, your monthly payments cover both interest and capital, gradually reducing the amount you owe until the mortgage is repaid.

Interest-only borrowing therefore requires a separate, credible strategy for repaying the capital.

Who Qualifies for an Interest-Only Mortgage as a First-Time Buyer?

Interest-only mortgages are available to some first-time buyers, but eligibility criteria are generally more restrictive than for standard repayment mortgages.

The main factors lenders consider include:

Deposit and Loan-to-Value

Interest-only mortgages usually require a larger deposit than standard repayment mortgages.

Some lenders allow borrowing up to 75% or 85% of the property’s value, depending on the repayment strategy and whether some of the mortgage is on a repayment basis.

The amount you can borrow may also depend on the type and value of the property.

Income Requirements

Some lenders have minimum income requirements for interest-only mortgages.

These vary considerably between lenders, and some apply different thresholds to sole and joint applicants.

Meeting the minimum income requirement does not automatically mean a mortgage will be affordable. Lenders will also assess your regular expenditure, existing financial commitments and ability to maintain the mortgage payments.

Credit History

Your credit history can influence which lenders will consider your application.

Missed payments, defaults or other adverse credit may restrict your options, particularly because fewer lenders offer interest-only mortgages to first-time buyers.

Repayment Strategy

You must have a credible plan for repaying the outstanding mortgage balance.

Lenders may accept certain savings, investments, pension arrangements or property assets, subject to their individual criteria.

Simply expecting your income to increase, planning to remortgage later or relying on an uncertain inheritance will not generally meet the requirements for an acceptable repayment strategy.

First-Time Buyer Restrictions

Some lenders offer residential interest-only mortgages but specifically exclude first-time buyers.

This means meeting a lender’s income, deposit and repayment strategy requirements does not necessarily mean you are eligible for its interest-only products.

At Kerr & Watson, we can assess your circumstances against different lenders’ criteria and help establish whether interest-only borrowing is a suitable option.

Which Lenders Offer Interest-Only Mortgages to First-Time Buyers?

Not all lenders that offer interest-only mortgages accept applications from first-time buyers.

For example, NatWest and HSBC UK consider eligible first-time buyers for residential interest-only mortgages, subject to their lending criteria and acceptable repayment strategies.

Other lenders, including Skipton Building Society and Virgin Money, currently exclude first-time buyers from their standard residential interest-only mortgage products.

The differences extend beyond whether first-time buyers are accepted. Lenders also have varying requirements for income, deposits, the amount that can be borrowed and how the mortgage balance will eventually be repaid.

Mortgage criteria can change, so it is important to check which options are available based on your circumstances before applying.

What Repayment Strategies Are Accepted for Interest-Only Mortgages?

With an interest-only mortgage, you are responsible for repaying the outstanding capital, usually at the end of the mortgage term.

Lenders must be satisfied that you have a credible repayment strategy capable of clearing the mortgage balance. Simply intending to remortgage or expecting your income to increase is not normally sufficient.

Depending on the lender, acceptable repayment strategies may include:

Savings and Investments

Some lenders accept cash savings, stocks and shares ISAs or investment portfolios as repayment strategies.

They will usually consider the current value of the assets, how they are expected to perform and whether they are sufficient to repay the mortgage.

Investments can fall in value, so there is a risk that the funds available at the end of the term will be less than expected.

Sale of Another Property

If you own another property, some lenders may accept the equity available from selling it as a repayment strategy.

The lender will assess the property’s value, any outstanding borrowing and whether the expected proceeds would be sufficient to repay the interest-only mortgage.

Pension Lump Sum

Certain lenders accept an eligible pension lump sum as a repayment strategy, subject to restrictions.

The amount that can be considered, the evidence required and the mortgage term will depend on the lender’s criteria and the pension arrangements.

Selling or Downsizing Your Home

Some lenders accept the future sale of the mortgaged property as a repayment strategy, but strict conditions usually apply.

The lender may require substantial equity in the property to demonstrate that selling would provide enough money to repay the mortgage and allow you to purchase suitable alternative accommodation.

This can be particularly challenging for first-time buyers who have not yet built up significant property equity.

Not every lender accepts the same repayment strategies. It is important to establish which options are acceptable before applying and to review your repayment plan throughout the mortgage term.

Advantages of an Interest-Only Mortgage for First-Time Buyers

Lower Monthly Payments

One of the main advantages is lower scheduled monthly mortgage payments compared with an equivalent repayment mortgage. However, lower monthly payments do not necessarily mean the mortgage will be easier to qualify for or more affordable overall, particularly when the cost of funding a repayment strategy is considered.

Paying only the interest each month can free up cash for other expenses, which may be useful if you’re early in your career or have other financial commitments. You can use our affordability calculators to get an initial idea of affordability.

Greater Financial Flexibility

Having smaller monthly payments allows you to invest or save your money elsewhere. This can be beneficial if you plan to invest in a fund that could yield higher returns, although you should always take professional financial advice in situations like this, and paying down your mortgage may be a better solution for you.

Option to Switch

Some borrowers may be able to switch from interest-only to a repayment mortgage later. However, this is not guaranteed and will depend on the lender’s requirements, affordability and circumstances at the time. You should not rely on a future switch as your repayment strategy.

Drawbacks to Consider

Repayment Uncertainty

At the end of the mortgage term, you’ll need to pay off the full loan amount. If your repayment vehicle hasn’t performed as expected, you could face financial stress. This makes it crucial to have a solid and reliable repayment strategy. You may also not have the amount of equity in your home that you hoped for to allow you to downsize.

Limited Lender Options

Interest-only mortgages are less common than they used to be, especially for first-time buyers. This limited availability can mean fewer options and potentially higher interest rates depending on the lender.

Potential for Higher Costs

While monthly payments are lower, the overall cost can be higher compared to a repayment mortgage. This is because you’re not reducing the loan balance, so interest is calculated on the full amount throughout the term.

Not Building Equity Through Mortgage Repayments

With an interest-only mortgage, your scheduled monthly payments do not reduce the capital you owe.

This means you will not build equity by gradually repaying the mortgage, unlike with a capital repayment mortgage.

Your equity could increase if property values rise or if you make additional capital repayments, but property prices can also fall.

This is an important consideration for first-time buyers who may want to move home or remortgage in the future.

Alternatives to Interest-Only Mortgages

Repayment Mortgage Over a Longer Term

Extending the mortgage term to 30 or even 40 years can lower your monthly payments, making a repayment mortgage more manageable. While this means you’ll pay more interest overall, you’ll also reduce the principal balance over time.

Part-and-Part Mortgage

This option combines the features of interest-only and repayment mortgages. You pay interest on part of the loan while also reducing the principal on the rest. It offers a middle ground, helping to manage monthly costs while still paying off some of the debt.

Family-Assisted Mortgages

Some first-time buyers may be able to increase their borrowing options with financial support from family members.

Arrangements such as a Joint Borrower Sole Proprietor (JBSP) mortgage allow another person, often a parent, to join the mortgage without becoming a legal owner of the property.

This may help with affordability, although the mortgage remains subject to lender criteria and the additional borrower takes on responsibility for the debt.

Shared Ownership

Shared Ownership allows eligible buyers to purchase a share of a property and pay rent on the remaining share.

This can reduce the initial mortgage amount required, although buyers must consider the combined cost of mortgage repayments, rent and any applicable service charges.

Shared Ownership mortgages are generally arranged on a capital repayment basis, subject to lender and scheme requirements.

Is an Interest-Only Mortgage Right for a First-Time Buyer?

An interest-only mortgage may be suitable for a small number of first-time buyers, particularly those who have substantial savings, investments or other assets that could provide a credible way to repay the outstanding mortgage.

However, interest-only borrowing is generally not appropriate simply because the monthly repayments on a standard repayment mortgage appear too expensive.

Although the scheduled monthly payments are lower, you remain responsible for repaying the capital. You must also consider the potential costs and risks associated with your repayment strategy.

For many first-time buyers, a capital repayment mortgage may be more suitable because the mortgage balance reduces over time.

If monthly repayments are a concern, alternatives such as a longer mortgage term, part-and-part borrowing or a family-assisted mortgage may be worth exploring.

At Kerr & Watson, we can review your circumstances, compare available mortgage options and explain the advantages and risks before you decide how to proceed.

How Kerr & Watson Can Help First-Time Buyers

Interest-only mortgages have specific eligibility requirements, and not every lender accepts first-time buyers.

At Kerr & Watson, we can review your income, deposit, repayment strategy and property plans to establish which options may be available.

We can also compare interest-only and capital repayment mortgages, helping you understand the monthly costs, longer-term commitments and potential risks of each approach.

Considering an Interest-Only Mortgage as a First-Time Buyer?

Speak to Kerr & Watson about your circumstances and find out whether interest-only borrowing or an alternative mortgage arrangement could be suitable.