Contractor Mortgages Interest Only
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A guide to Interest-only Contractor mortgages
An Interest-only mortgage is a lesser-used mortgage type whereby the borrower only repays the interest accumulated monthly, rather than the capital they have borrowed. This is generally considered to be a riskier option for Standard Residential Mortgages, as it results in the full loan amount becoming repayable at the end of the mortgage term.
This type of repayment type is more common in Buy to Let mortgages, as the property itself is a good repayment vehicle at the end of the mortgage term.
Is an Interest-only mortgage a good option for Contractors?
An Interest-only mortgage can potentially provide a viable option for a day-rate contractor, as the monthly repayments will be very low. There is, however, an inherent risk in this type of mortgage product, as you would need to be confident that you will be able to repay the total outstanding loan amount at the end of the mortgage term.
How does it differ from Capital Repayment?
The following table shows the main differences between an Interest-only and a Capital Repayment mortgage:
|Interest Only Mortgages||Capital repayment Mortgages|
|Only the interest component of the mortgage is paid every month. The full balance remains outstanding||Both interest and an element of the capital will be paid monthly, gradually reducing the amount owed|
|At the end of the mortgage term, the entire amount borrowed will be due, as you have only paid the interest throughout the term||At the end of the mortgage term, the whole loan amount has already been repaid|
|Monthly mortgage payments will be considerably lower than they are for repayment mortgages||Monthly payments are higher, as they are reducing the balance|
|A more substantial deposit and an approved repayment vehicle will need to be in place in order to secure an offer||There is no need for any type of repayment vehicle, as the loan capital is repaid monthly over the loan term|
Are there different affordability criteria for Interest-only mortgages?
There are fairly strict lending criteria to meet in order to obtain an Interest-only mortgage and these are generally more extensive than they are for Repayment Mortgage. These are not necessarily required by all Mortgage Lenders and there will be more flexibility if you approach specialist lenders who are more accommodating to the needs of contractors, rather than typical high street banks.
However, many lenders may exercise the following criteria:
- 25% deposit requirement
- A minimum income threshold to meet
- A maximum application age of seventy years
- the borrower must have an acceptable payment vehicle in place
What repayment vehicles do contractors use for Interest-only mortgages?
The most commonly used repayment vehicle used by contractors and across the board, to repay the outstanding loan at the end of an Interest-only mortgage term is sale of the property. Whilst this is a viable option in the case of Buy to Let, it may not be the most convenient if you are contemplating the sale of your own residential home.
As this method of repayment is also considered to be downsizing, the majority of lenders will not accept this as a reasonable repayment vehicle. It is possible, however, to utilise this method if you approach the right lender.
There is some degree of variance in what individual Mortgage Lenders are willing to accept as acceptable repayment vehicles, however, so it’s important to speak to an adviser like ourselves to find the most suitable lender for you.
Other potentially acceptable repayment vehicles include:
Sale of a second residential or Buy to Let property
If you are a landlord with a portfolio of property, it may be possible to use a second or subsequently owned additional home.
Depending on the type of contractor work that you carry out, you may be liable for bonus or commission payments. This could potentially be used to repay the loan.
Having available substantial cash savings may be a viable repayment method.
Endowment policies are no longer commonly used as they often failed to accumulate the level of growth required to repay the full loan amount. They are, however, still an option, if the investment company is able to offer an assurance to the Mortgage Lender that they will cover the full loan balance.
It’s possible to use the 25% tax free lump sum payment from your pension as a repayment vehicle.
Stocks and Shares (including ISA) and other investments
Most lenders will accept a range of different ISAs stocks, shares, bonds and other investment types as repayment vehicles, if they are confident the value of your asset(s) will be adequate at the end of the mortgage term.
Are Interest-only mortgages expensive?
The interest rates and arrangement fees for an Interest-only mortgage are no more expensive than for other mortgage types, however, the long term costs will usually be higher. This is because interest will not decrease over time, whereas on a Repayment Mortgage, you will pay interest on the outstanding balance, which reduces over time.
Are interest only mortgages available to IR35 Contractors?
As this type of employment structure is fairly standard for public sector workers, particularly those in the areas of IT, it is possible to find specialist Mortgage Lenders who are willing to consider borrowers who are trading under these contract rules.
How can a Mortgage Broker help?
Securing a mortgage and particularly an Interest-only mortgage can be challenging for contractors, however, here at Mint Mortgages and Protection we have access to a range of specialist lenders who will be willing to consider your mortgage application based on your own specific individual circumstances.
We can ensure that you find those contractor-friendly lenders who offer the most competitive deals and allow you to make the most of your income, by acknowledging all of it, regardless of your trading type. We can also advise you about suitable repayment vehicles and ensure that the application process runs smoothly throughout.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE