How To Get An Interest-Only Mortgage If You're Self-Employed

Find out about eligibility criteria, repayment vehicles, maximum loan-to-values and more.

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Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

Interest-only mortgages can be a great option for self-employed borrowers and are still widely available.

But whilst they offer the benefit of cheaper monthly payments, they also carry more risk for applicants and mortgage lenders alike.

For that reason, there are stricter eligibility criteria for interest-only self-employed mortgages than for the equivalent capital repayment mortgage.

Read on to find out more...

What is an interest-only mortgage?

As the name implies, an interest-only mortgage is a secured home loan that, for the duration of the term, only requires mortgage interest to be repaid each month.

The amount borrowed, the capital, still has to be repaid at the end of the term as a single lump sum.

The method for repaying the debt itself is known as the repayment vehicle or repayment plan.  Every lender has it's own list of acceptable repayment vehicles, with some providers more flexibile than others.

What are the advantages and disadvantages of an interest-only mortgage?

Unlike a capital repayment mortgage, where both the interest and a part of the capital are repaid each month, an interest-only self-employed mortgage doesn't pay off the sum borrowed during the term.

The biggest advantage of an interest-only mortgage, therefore, is that the monthly payments are significantly lower.

Interest-only monthly payments vs capital repayment

As an example, on a £300,000 interest-only mortgage on a 25-year term and 4% interest rate, you'd only pay £1000 a month. On a capital repayment basis, the monthly mortgage payment is £1584, almost 60% more.

However, there are some drawbacks including:

  1. The original loan amount needs to be repaid as a lump sum at the end of the mortgage term
  2. Interest-only mortgages are more expensive overall as more interest is accrued.
  3. A larger deposit (or equity if remortgaging) is required.

Why do I pay more interest with an interest-only mortgage?

The second drawback above is important to consider. The reason more interest is paid on an interest-only mortgage is because the outstanding debt is not being reduced.  So interest on the original loan amount is paid every month.

With a capital repayment mortgage, you're chipping away at the capital each month. So over time, as the debt reduces, a decreasing proportion of the monthly repayment goes towards interest and an increasing proportion towards paying the capital.

Can I get an interest-only mortgage on a residential property?

Yes, self-employed applicants can get an interest-only mortgage for residential home purchases and remortgages.

That said, the eligibility criteria for a residential interest-only mortgage are more stringent than they were before the global financial crisis.

You can, of course, get an interest-only mortgage for buy-to-let property investment. The eligibility criteria for getting a mortgage on a residential rental property are less onerous, and typically, only a 25% deposit is needed.

Deposit requirements for owner-occupied interest-only mortgages

You are likely to need a larger deposit than you would for a capital repayment mortgage. Anywhere between 25 and 50 per cent typically, depending on the lender, your circumstances, and the repayment vehicle.

Whilst it's not the norm., one or two mortgage providers will not lend on an interest-only basis unless it can be shown you could afford the equivalent mortgage on a capital repayment basis.

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What repayment vehicles can I use?

The most common repayment plans are:

  • Selling the property secured against the mortgage and downsizing.
  • Selling another property you own. An investment property or holiday home for example.
  • Private pension
  • An ISA invested in shares, unit trusts, investment bonds, OEIC (Open Ended Investment Company) and so on.
  • Savings
  • An endowment policy.

A combination of repayment vehicles can be used to cover the loan.

Sale of the mortgaged property as a repayment vehicle

Selling the property the mortgage is secured on is the most popular repayment plan.

Where it's your main home and you intend to downsize at the end of the term, banks and building societies set additional eligibility criteria including:

  1. A maximum loan-to-value of somewhere between 50-70 per cent.
  2. A requirement to have a minimum level of equity in the property when taking out the loan.  Between £100000 and £300,000 is common. Sometimes a higher minimum level is required for London properties.

Evidencing other repayment vehicles

Borrowers must demonstrate the value of their savings or investment vehicle is at least equal to the capital loan amount.  

With pension pots, 25 per cent of the projected pension plan value is usually acceptable, though some mortgage lenders use 25% of the current pension value instead.  Either way, the allocated percentage must cover the loan amount.

Can I use an inheritance as a repayment vehicle?

Yes, a tiny handful of specialist lenders accept an inheritance. But only if the person you are inheriting from has already passed away and the amount you expect to inherit can be proven. To that end, the mortgage company may need to see the Grant of Probate.

Of course, if you've already received an inheritance, that's fine. Cash held in a savings account and/or ISA is acceptable, provided you can evidence a sum that covers the loan amount.

How much can I borrow on an interest-only mortgage?

The two key metrics for self-employed mortgages are:

  • Loan-to-Income (LTI)
  • Loan-to-Value (LTV)

As a rule of thumb, you can borrow an LTI of around 4.5 times your sole or joint income, subject to the lender's maximum loan-to-value (LTV) which is typically 50 – 75 per cent for interest-only.

Higher earners and/or self-employed professionals may be able to borrow at a higher income multiple of 4.75 to 5.5 loan-to-income (LTI)

See our self-employed mortgage guides for limited company directors, contractors, LLP equity partners and sole traders for details of how allowable income is calculated.

Next steps to getting a mortgage quote

For an independent, whole-of-market mortgage quote, speak to an adviser from SEMH by booking a call via our Getting Started quiz.  We're 5 * rated on Google and pride ourselves on providing outstanding service to our clients.

You can schedule a call at a time to suit you including early morning and evening timeslots.

Alternatively, call us direct on 0117 205 0655 during our office hours of 9am to 5pm Monday to Friday.

Graham Cox - MLIBF CeMAP Mortgage Adviser & Director of Hub FS Ltd

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited.

Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK get great mortgage and protection deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, FT Adviser, and BBC Radio Bristol.