Buying Your First Home with an Interest Only Mortgage
Buying your first home is a big step, and understanding your mortgage options can be just as overwhelming as choosing the property itself.
While most first time buyers opt for traditional repayment mortgages, there’s another type you might have come across, the interest only mortgage. But is this a realistic option if you’re buying your first home?
What is an Interest Only Mortgage?
An interest only mortgage is exactly what it sounds like, a loan where you only repay the interest each month, rather than the interest plus the capital.
This means your monthly payments are lower compared to a repayment mortgage, but the full loan amount still needs to be repaid at the end of the mortgage term.
For example, if you take out an interest only mortgage for £200,000 over 20 years, you’ll only be paying the interest throughout that time. The original £200,000 will still be due in full at the end of the term so you would be responsible for ensuring this is paid back.
How Does It Work?
Each month, you’ll pay only the interest due on the loan. Because you’re not paying down the capital, your debt doesn’t reduce over time.
This structure gives you lower monthly payments, which can help with cash flow, especially if you’re expecting your income to increase or if you plan to repay the mortgage through other means, such as investments or by downsizing.
The catch is that you need a solid plan for repaying the original loan. Without it, you could find yourself facing a significant bill when the mortgage term ends, with no realistic way to pay it off.
Lenders will want to know exactly how you intend to repay the mortgage, and this is one of the main reasons interest only options are more difficult to access for first time buyers. For instance, a common repayment strategy is downsizing, but most first time buyers will not have a big enough deposit for the required equity within the property to do that, any may not have a large investment pot at this time.
Can First Time Buyers Get an Interest Only Mortgage?
Yes, it can be possible, but it’s not always straightforward. Most lenders see interest only mortgages as higher risk, particularly for first time buyers who may not have a proven track record of managing a mortgage. As a result, they often come with stricter criteria.
You’ll likely need:
- A larger deposit, usually at least 25% of the property’s value, and often more. For instance, some lenders may even need you to have £300,000 in equity from the outset.
- A strong personal income, some lenders require at least £75,000 a year as a sole applicant or £100,000 as a joint income.
- A clear and credible repayment plan for the loan that meets the lender’s criteria of acceptable plans.
- A strong credit score and financial history may also be needed.
Because of these requirements, first time buyers seeking interest only mortgages usually need to be in a particularly strong financial position. In most cases, these products are more common among high earners, landlords, or those with significant savings. They may also be far from suitable so you should always take professional advice to understand the full risks involved.
Find out Your Options
Why Would You Consider an Interest Only Mortgage as a First Time Buyer?
Despite the extra requirements, there are some situations where an interest only mortgage might appeal.
You might consider it if:
- You have a large deposit, enough to downsize later, but want to keep your monthly outgoings low.
- You’re expecting a significant financial windfall in the future.
- You plan to sell the property before the mortgage ends and use the proceeds to pay off the loan.
- You’re buying a property with investment in mind and intend to remortgage or switch to repayment terms later.
Choosing this type of mortgage as a first time buyer can free up income in the short term, but you must be realistic about the long-term responsibility of repaying the loan.
At Kerr & Watson, we’ll help you look beyond the headline figures and fully understand the implications of your mortgage choice as interest only is not right for everyone.
What Repayment Strategies Are Accepted?
Lenders will not approve an interest only mortgage unless they are satisfied with your repayment strategy. This is a plan for how you intend to repay the full amount at the end of the mortgage term.
Common strategies include:
- Selling the property to repay the loan.
- Using investments or savings (such as ISAs, pensions, or other assets).
- Sale of properties in the background
You’ll need to demonstrate that your chosen strategy is both realistic and achievable. Simply saying you hope to have the money in the future won’t be enough.
It is not common for people to try to use future inheritances as a repayment method, however, as these are not guaranteed, most lenders will not accept this method.
What Are the Advantages?
The main benefit of an interest only mortgage is affordability in the short term. Because you’re only paying the interest, your monthly payments are lower than with a repayment mortgage.
This can give you more breathing room in your budget, especially if you need to balance your mortgage with other costs.
It can also be useful if you plan to invest the money you save from lower repayments, or if your income is likely to increase in the coming years, making it easier to switch to a repayment mortgage later.
And the Disadvantages?
There are several important downsides to consider:
- You won’t build any equity in the property through monthly repayments, only through the appreciation of the property.
- You’ll still owe the full loan amount at the end of the term.
- Interest only mortgages often require larger deposits and higher incomes.
- Lenders may be limited, and rates could be higher with some lenders too.
- If your repayment strategy fails, you may be forced to sell the property.
If you’re unsure about whether this type of mortgage is suitable for you, it’s essential to get advice.
At Kerr & Watson, we’ll help you weigh the pros and cons and explore alternatives that might be better suited to your situation.
Alternatives Worth Considering
For many first time buyers, a repayment mortgage is more accessible and less risky. You’ll make higher monthly payments, but you’ll be reducing your debt each month and building up equity in your home.
Other alternatives include:
- Part and part mortgages: where you pay off some of the capital and some interest each month.
- Extended mortgage terms: spreading repayments over a longer period to reduce monthly costs.
- Help to Buy and Shared Ownership schemes: which could offer a more affordable route to homeownership.
We can talk you through these options and help you find the one that works best for your needs.
Conclusion
An interest only mortgage might be suitable for some first time buyers, but it comes with challenges and risks.
You’ll need to meet strict eligibility criteria, provide a credible repayment plan, and be prepared to manage the long-term implications.
It’s not the most common route for a reason but that doesn’t mean it’s off the table entirely.
At Kerr & Watson, we specialise in helping first time buyers like you make confident, informed choices.
Whether you’re exploring interest only mortgages or simply want to understand all your options, we’re here to help you every step of the way.
If you’re considering your first mortgage and want personalised guidance, contact us today for independent advice.
