Case Study –Structuring a £1.239 Million Interest-Only Mortgage With Flexibility to Make Capital Repayments

The Situation

A couple approached Henry Dannell while purchasing a property for £2.065 million as their main residence.

They required a mortgage of £1.239 million, representing approximately 60% loan-to-value. One applicant had previously owned property, while the other was a first-time buyer.

A key priority was managing their contractual monthly commitments. The clients therefore preferred an interest-only structure, while intending to make voluntary capital repayments as their financial position allowed.

Flexibility was also important. Rather than committing to a mortgage with early repayment charges, the clients preferred a tracker product that would allow them to make capital repayments as their circumstances evolved.

The Challenge

Both applicants' incomes were required to support the level of borrowing needed. However, one applicant had only been appointed as a company director in December 2023 and had one full year of trading history available for assessment. This reduced the number of lenders able to consider the application, as lender requirements around trading history can vary considerably. The challenge was therefore not simply to find a lender prepared to consider one year's trading history. The mortgage also needed to support the required £1.239 million borrowing, accommodate an interest-only structure and provide the repayment flexibility the clients wanted.

The Solution

We assessed the market against each of these requirements, considering the clients' income position alongside their preferred mortgage structure and plans for reducing the borrowing over time. Halifax was identified as appropriate for the circumstances. For this particular application, its criteria allowed the case to proceed using the available trading history, while the selected tracker mortgage also accommodated the required interest-only structure and the clients' preference for making capital repayments. Alternative lenders were considered but did not provide the same combination of affordability, criteria and product flexibility for the clients' circumstances. The clients proceeded with an interest-only tracker mortgage, helping them manage their contractual monthly commitments while retaining the flexibility to make ad hoc capital repayments over the anticipated next 24 months. The product fee was added to the mortgage rather than paid upfront, allowing the clients to retain more of their available cash for the purchase. The clients understood that interest would be payable on the fee once added to the mortgage balance. The resulting £1.239 million mortgage supported the purchase of their £2.065 million home while accommodating the available trading history and providing the flexibility the clients wanted as they planned to reduce the outstanding balance. The case demonstrates why lender criteria and mortgage structure should be considered together. Identifying a lender able to accommodate a particular income profile is only part of the process; the resulting borrowing should also reflect how the clients intend to manage their debt over time. Please note: A mortgage is secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. With an interest-only mortgage, the capital balance remains outstanding and an appropriate repayment strategy is required. Tracker mortgage payments can increase if the underlying rate increases. Lender criteria and product availability are subject to change.