Interest Only Contractor Mortgages

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Interest Only Contractor Mortgages - why seek advice

Taking an interest only mortgage is a helpful way of keeping the payments down on a mortgage, but there are fewer of these mortgages available in the marketplace. Working as a contractor can make it more complex to find the right lender, so let us help you find an appropriate deal.

What is an Interest Only Mortgage?

With an interest only mortgage, you don’t reduce the balance of the loan from your mortgage provider. You only repay the interest on the borrowing. So if you take an interest only mortgage of £300,000 over 25 years to buy a home, at the end of the 25 year mortgage term you will have to pay that £300,000 back in full. 

With a repayment mortgage, provided you make all the payments due, at the end of 25 years you will fully own the property.

Interest only is common in Buy to Let mortgages but less frequent in residential loans, as most people want to eventually own their property outright. 

Is an interest only mortgage a good option for contractors?

The main reason that people choose an interest only mortgage is to keep repayments as low as possible. Most contractors receive a competitive income, however, so there are likely to be other reasons why you would prefer an interest only deal. 

The challenge is that there are not many interest only mortgages available on residential properties. That’s because this is a risky way to borrow, as you need to repay the loan at the end. 

In addition, as a contractor there may not be many lenders available to you, so you may find that interest rates are not as competitive as on a repayment mortgage. 

How will I repay the loan at the end?

This is the big question – and with interest only mortgages you will need to be clear about your ‘exit strategy.’

Typical ways that people repay their interest only loans include: 

Remortgaging:  You can repay an interest-only mortgage simply by taking out another mortgage. You can do this at any time. The new mortgage could be a repayment option or another interest-only one. You will need to meet the new lender’s criteria, bearing in mind that you will be older and your circumstances may have changed.

Selling the property: Some people sell the property to repay their interest-only mortgage. If you are lucky, property prices will have increased and you can repay the whole loan amount with some money left over. But remember that property prices can and do fall. If you run into negative equity, you may have to find additional funds.

With savings & investments: If you take out an interest only mortgage, it’s a good idea to get financial advice about saving and investing for the future, especially if you want to repay the loan this way.

Most lenders will want a clear statement about how you will repay the amount borrowed. They will sometimes call this the ‘repayment vehicle.’

Are there many interest only contractor mortgages?

Some lenders are more contractor friendly than others. As your mortgage broker we will talk to you about interest only borrowing and whether this is the most suitable option, and then identify lenders that will accept contractors within their criteria. 

As with any mortgage you’ll need to prove that you can afford the monthly mortgage payments, and that you meet the lender’s minimum income threshold. This usually is no issue for a contractor, as long as you have a current contract that ideally will last for at least another six months. 

Some lenders will take your day rate as your income, while others will look at your income after tax and expenses. 

How can Mortgages at McAteer help?

As specialist mortgage advisors it’s our role to talk to you about your property plans, your personal situation and the most appropriate mortgage options to meet your needs. 

By understanding your circumstances we can recommend the most appropriate mortgage product to meet your needs, whether this is interest only, repayment or a blend of the two. 

We do a lot of contractor work, which means we can quickly identify the most suitable lenders. Through The Openwork Partnership, we are fully authorised and regulated by the Financial Conduct Authority, so get in touch. We will explain more about interest only contractor mortgages and how we can help.

Mortgages by McAteer Ltd is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

Some buy to let mortgages are not regulated by the Financial Conduct Authority

Approved by The Openwork Partnership on 26/10/2023.