Interest Only mortgages have had a rough time recently. They are not right for everyone, but if you have the assets they can provide flexibility.
Oliver has been acquiring property and renting it out professionally for over 10 years. He had seen peaks and troughs before and knew the property market was constantly changing. What he didn’t expect however was the way in which interest only lending would change. He lived in a modest house in central London worth almost £1m and had a mortgage of around £300,000. The rate was due for renewal, however he found his own bank were not interested in renewing because he was on an interest only mortgage and insisted he swap to a repayment mortgage. With only 5 years until state retirement age his repayments were exorbitant and completely unaffordable.
What he did have however was a property portfolio worth around £3m and equity of almost £2m. His plan had always been to sell few of his less profitable buy to let properties to settle the residential mortgage balance. Oliver planned to use the income generated by these properties to pay for the residential re-mortgage, something he is confident of, but many other lenders would be sceptical of now.
We sourced a number of lenders that were happy to lend over a 10 year term on the basis that Oliver’s income would be sustainable past state retirement age. Of those lenders a few were happy to consider the interest only loan based on the equity he held in a few of these buy to let properties. They took estimates of value from the website Zoopla and ensured the equity was around 120% the balance to be repaid.
What about the risks? If the property market crashed and prices dropped, Oliver may find himself with insufficient equity to repay the residential mortgage, leaving him forced to sell the property he intended to retire in. Oliver weighed up this risk and was confident that he had more than enough equity, and that he could sell some properties at the first signs of trouble. What if he lost a number of tenants in a row? Oliver had experienced this kind of situation before, and part of the plan was to keep a contingency fund of around 3 months interest for every property including his residential, which covered unexpected expenses and void periods.
Talking to a mortgage broker might create far more opportunity than you might have realised. Remember we charge some of the lowest fees in the industry, and are eager to pass on any of the knowledge we have learned over the past 10 years in the business. Call us on 0207 183 1101 to see how we can help you.
This case study was specific to this client and your situation and circumstances may be different. You should always seek advice specific to yourself.