The fact that the bank didn't fully explain why they wouldn't approve your application is disappointing at best. Depending on where (country and specific location) the rental property is, many banks will not take any rental income into account. Regarding the interest-only aspect, the banks here will only calculate existing mortgages on a capital plus interest basis, regardless of whether the contract is for interest-only for the full term, and irrespective of the value of the property. They will also stress the mortgage on a higher rate, which further adds to the monthly deficit in their calculations. This varies greatly between banks - some add 2% to your actual rate for the stress test, and others add 2% to their own investment variable rate, which could produce an assessment rate of more than 7% (I think BoI's assessment rate could be 7.65% - this kills the application). Depending on the location, the term remaining and the current interest rate, you could get a very different response from another lender.
Best Regards,
Dave Curry, Irish Mortgage Corporation