What’s an interest-only mortgage?
With an interest-only mortgage, you’re only required to repay the interest on the amount of money borrowed.
As you’re not paying back any of the loan amount, this usually results in interest-only mortgages being cheaper than standard repayment mortgages; however, they usually come with a higher deposit requirement too.
If you take out an interest-only mortgage, it’s important to remember that you’ll need to pay back the full loan amount at the end of the payment term.
What’s the difference between an interest-only mortgage and a capital repayment mortgage?
The are two main mortgage repayment methods: Capital and interest only.
Capital repayment mortgage:
With a capital repayment mortgage, you pay the interest on your loan and part of the loan amount itself (known as the capital).
Because you’re repaying both the interest and the capital, your monthly repayments will be higher compared to an interest-only mortgage.
When you reach the end of your loan term, you’ll have paid off the entire amount that you owe.
With an interest-only mortgage, you only pay the interest on the loan, meaning your monthly payments will be lower than if you had a capital repayment mortgage.
As you’ll still owe the lender the full loan amount when the term ends, you’ll need to prove to the lender that you have a repayment plan in place to repay the capital when you apply.
This can be demonstrated by:
- Savings or ISAs
- Endowment policies
It’s important to mention that on occasion, lenders may provide a mortgage that combines both interest-only and capital repayment. For a thorough understanding of the potential choices, it’s advisable to consult with an advisor.
Are interest-only mortgages still available?
Yes, although not as common as they used to be, interest-only mortgages are still available and most commonly used by landlords for buy-to-let property purchases – where the property can be sold at the end of the mortgage to pay back the borrowed sum.
Advantages of interest-only mortgages:
Interest-only mortgages come with some advantages, including:
- Lower monthly payments, leaving you with more cash in your pocket to invest or save. Often, savings are invested into the property in the form of home renovations, increasing the property’s value
- The opportunity to purchase a home which might otherwise be unaffordable
- Increased flexibility to make overpayments or switch to a repayment mortgage during your term
Disadvantages of interest-only mortgages:
There are also some drawbacks to interest-only mortgages, like:
- When the mortgage term is over, you’re left with all of the capital to pay off
- If you don’t have enough to pay the balance at the end of your mortgage, you could risk losing your assets
With interest-only mortgages, lenders often require:
- A larger deposit, usually 25% or more
- Proof that you’re a high-earner
Both act as a form of security that you’ll be able to repay the capital at the end of your term.
What happens at the end of an interest-only mortgage?
As previously mentioned, the remaining balance of your interest-only mortgage will need to be repaid in full when your term ends.
This is the capital you borrowed to buy your home at the beginning of your contract. As agreed when you took out the mortgage, the capital is returned to the lender.
What happens if you can’t repay an interest-only mortgage at the end of your term?
If, at the end of your term, you’re in a position where you can’t repay the loan amount fully, you may be able to get an extension on the mortgage term.
Alternatively, if you have acquired sufficient equity in the property, this could also be used to pay off the mortgage in full.
Provided your property hasn’t decreased in value, you might have to sell the property to pay back your loan. Any increase in value is available for you to buy or use as equity in another property.
If no other solution is found, you could risk losing other assets in the form of payment to cover the balance at the end of your mortgage.
Can I pay off an interest-only mortgage early?
In most instances, you can pay off your interest-only mortgage early or make overpayments during your term; however, depending on your mortgage, there may be limitations to the total amount you can repay without facing an Early Repayment Charge (ERC).
If you’re already on an interest-only mortgage, check your mortgage terms for more information on repayment limits or charges.
How much are interest rates on interest-only mortgages?
To find out what interest rates are on interest-only mortgages, call us now on 01489 346624.
Our CeMAP qualified team can search the whole of market to uncover what might be available to you and help discuss your options.
Am I eligible for an interest-only mortgage?
If you’re interested in applying for an interest-only mortgage, you’ll usually need to hit certain criteria before being accepted:
- You’ll need to earn at least £75,000 a year
- You’ll need to be able to provide a large deposit – 25% or above
- You’ll need to demonstrate how you intend to repay the amount you borrow by the time the mortgage term ends (without relying on selling the property to provide this money – just in case the property value decreases)
Although these criteria provide insight into the factors that lenders consider, they are not necessarily strict. Depending on the specifics of your situation, you might qualify for an interest-only mortgage even if you don’t meet all (or any) of these requirements.
It’s advisable to discuss your options with a professional to determine the best course of action for your individual circumstances.
Call 01489 346624 now if you’d to talk with one of our CeMAP advisors. We’re waiting for your call.