See how we can help

Get started online

Interest-only investment mortgage

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 6, 2023

Interest-only investment mortgage

An interest-only mortgage investment mortgage may be a good option if you are interested in property investment.

Although you might be able to have interest only for the term, there are many things you need to consider. These include what amount you will need to deposit, who you might lend it to, and how you plan to repay it. Let’s look in more detail.

With an interest-only mortgage, you pay the interest rate monthly, and then, at the end of the term, you complete the repayments.

We are expert mortgage brokers

We have access to over 200 lenders in the UK to get you the best rates

Get your Quote

What is an interest only mortgage for investment properties?

An investment property is different from a simple residential property. You must take out a mortgage and gradually pay off the capital.

An interest-only mortgage allows you to repay only the interest each month, the principal and any accrued interest over the term. It does not require that you re-pay the entire capital and interest during the mortgage term. Instead of paying the entire term’s capital in one lump sum, you will need to find a solution.

These two concepts are combined in an interest-only investment loan. This type of financing is used to invest in property and doesn’t require capital repayments.

Get started online


Why would an interest-only mortgage be granted for an investment property?

You are taking out this type of loan to make money, either now or in the future. You can pay the monthly interest only to keep your monthly payments low. This will allow you to take revenue from the rental income each month or make a profit when the house is sold in the future.

If you are confident you can repay the loan in full, you might choose to have an interest-only mortgage for an investment property. This could be because you profit from rising house prices or because you have savings or inheritance that will allow you to do this.

However, this approach has obvious risks, such as possible housing crashes leading to negative equity or other circumstances. This is why a mortgage broker specialising in investment property finance is crucial for helping you make the right decision and fully understand the implications.

Get started online


Different types of interest-only investment mortgages

Many investment property mortgages can benefit from interest-only mortgages.

  • Purchase-to-let mortgage – Hopefully, your rental income will sufficiently cover the monthly mortgage payments and make you a profit. This is a good option if you are looking to build or expand a property portfolio. Any income can be used to renovate or improve other properties in your business. If you’re looking to replace an income from a job, or if the property is a future investment that will provide a pension or pass it on to your heirs, this option can be a great way to do so.
  • HMO mortgages – House of multiple occupancy mortgages are available for people who live in houses with shared facilities but not as a family. This can be used for student housing or house-shares by young professionals where single occupancy is not feasible. Due to the nature and complexity of this type of loan, landlords will have to apply for a stricter application.
  • Holiday mortgages If you want to purchase a property abroad or in the UK to rent it out for holiday rentals, an interest-only loan offers similar benefits to buy-to-let mortgages. Although this is a niche market, there are many products available. However, it is important to remember that buying abroad can be more difficult. This is an option if you want to profit from your property investment while also enjoying holidays in the area. Your guests will pay the cost of the rental until the end.
  • Commercial mortgages Not all lenders offer commercial loans, but a broker will help you locate those that specialize in interest-only loans. Borrowers with fluctuating incomes may find the repayment terms more flexible. For everyone, from small businesses to large corporations, commercial properties can be a lucrative investment. You could buy a building to house a restaurant, nursing facility, or office. These loans are also great for those who wish to buy a property to use as a trading asset. Semi-commercial loans may be available to those who own their businesses.
  • Purchase-to-renovate Mortgages: These mortgages are for investors who require a mortgage to pay the property’s cost and the necessary renovation work. While most lenders won’t lend to major or derelict conversions, they will consider ‘fixer-upper’ mortgages for investors interested in ‘flipping’ houses – transforming a property into a desirable home. This range is flexible depending on your goals, how much work you need, your credit history, and whether or not you are an experienced property developer.
Get started online


How a broker can help you secure an investment mortgage

You will need help finding the best interest rate and a lender that will accept your application. An experienced, respected advisor can help you find a lender willing to accept your loan.

It can be difficult to find the right lender for the loan you need. A broker will have access to all the markets and be able to find the best deals. A good investment mortgage broker will help you find the best deal for your situation and assist you with your application.

Enquire here today to speak with a specialist broker.

The rules and criteria of interest-only investment mortgages differ for each type of loan. They can be more flexible for lenders, but they can also make it difficult to understand the principles.

Get started online


Criteria for eligibility

There are many criteria, and it is essential to recognise that not all loans will be identical. As with many niche areas of lending the discretion lies with mortgage lenders, but the main factors are:

  • To get an investment loan with interest only, the loan-to-value ratio is a loan-to-value ratio. The maximum limit for a loan-to-value loan is 80%, but it’s more common to have 70-75%.
  • Purchase limits: Lenders may limit the amount they lend. Many HMO mortgages have a PS1m limit.
  • Lenders don’t care as much about traditional regulations like salaries, but they do care more about how you pay back the loan. However, they expect proof that your income will be sufficient to cover both personal and investment mortgages. Although first-time landlords have more restrictions than other tenants, lenders can assess affordability.
  • Repayment strategy: Stronger repayment intentions will result in a better loan-to-value ratio and lower interest rates. You’ll also be able to secure a more favourable interest rate. The bank will be most concerned about your financial stability and property value when the term ends. This is when they will recover the entire mortgage cost.
Get started online

What lenders offer investment mortgages?

Many lenders offer interest-only investment loans. However, some niches are more difficult to find than others, such as HMOs or holiday lets.

Each lender has its own unique set of details and small print that may not be obvious. Some niche lenders, which are smaller, offer greater flexibility. The norm is 70-75% loan to value ratio. However, some lenders can extend HMO mortgages up to 85%. This is the riskiest and most stringent mortgage criteria. These mortgage providers are…

  • Kent Reliance
  • Foundation Home Loans
  • Kensington Mortgages

Both small and large banks offer these products. These include:

  • Barclays
  • HSBC
  • Castle Trust
  • Gatehouse Bank

Each type of mortgage has its own limitations, however. For example, the number of bedrooms and loan-to-value caps on HMOs. The UK-based property can also be used for holiday lets loans. You may also need to consider whether you are an experienced landlord borrower.

Get started online


Interest-only mortgage for buy-to-let property

This is where you convert your existing home into an investment property and release its equity to purchase a new home. You can have either one mortgage with the same lender or two different mortgages through a let–to-buy agreement. The first is your buy-to-let agreement on your home. You will also have a new residential mortgage for your new property.

You may be able to get both mortgages on an interest-only basis.

Lenders expect you to meet both the requirements for each type of mortgage. They will also want to see proof that you can afford both. Lenders will expect that your equity in your first house is sufficient to serve as a deposit for your second. Also, remember that second homes are subject to an additional 3% stamp duty when purchased.

What are the alternatives to this?

You might consider a capital repayment mortgage if interest-only is not for you. Although this would mean higher monthly payments, you will be better off if you have paid off the entire property cost by the end of your term.

You also have other financing options such as…

  • Bridging loans to short-term solutions
  • Development financing for borrowers who build or renovate a property.
  • Get equity out of your existing home
  • A second-charge mortgage
  • A personal or business loan

Speak to an investment mortgage broker who specialises in your area

Our brokers are highly respected in their fields and deeply understand the investment financing niche. They are experts in interest-only mortgages and have access to all the market. Their contacts and experience can help you get the best possible outcome for your mortgage deal.

We will get back to you today to match you with the right expert so you can make your future investments. We’re available to help you with any questions or concerns. Call today or send an enquiry, and we’ll set up a chat for free.

Get started online


Investment interest only mortgage FAQs

Is it possible to make a profit from an interest-only mortgage

You can get a return on your property even if you have only paid the interest. This is possible by selling the property for more than the price you bought. If your rental income is greater than your interest payments, it could make you money monthly as long as the mortgage payment can be fully paid off.

Contact us today for expert investment interest-only mortgage advice.

Get started online