An interest-only mortgage allows you to pay only the interest charges on your loan each month, without any portion going towards the original borrowed capital. This means your monthly payments are lower compared to a repayment mortgage.
At the end of the mortgage term, you will still owe the initial borrowed amount to the lender. You will only have paid the interest, meaning you will still have the initial amount left to pay.
Typically, this outstanding balance needs to be paid as a lump sum.
Interest-only mortgages may not be suitable for everyone. They require careful consideration and planning. This is because at the end of your mortgage, you will need to pay a large lump sum.
Before taking out an interest-only mortgage, consider factors such as:
Yes. Interest-only mortgages for buy-to-let properties are available but may have specific requirements and conditions. Lenders typically assess the viability of the investment property and the potential rental income it can generate. Eligibility criteria, loan-to-value ratios, and interest rates may differ for buy-to-let interest-only mortgages compared to residential properties.
Yes, sometimes. The term length for an interest-only mortgage can vary depending on the lender’s policies. Some lenders may impose restrictions on the maximum term length for interest-only mortgages. Typically, the maximum term length ranges from 25 to 30 years, but it is advisable to check with your lender to understand their specific terms and conditions. (Source)
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With an interest-only mortgage, you pay the interest on the loan in instalments. At the end of the term, you will still owe the original amount you borrowed which will be paid in a lump sum.
With a repayment mortgage, you pay back a small part of the loan and the interest each month. At the end, you will not owe any money, but the monthly repayments will be higher.
If you borrow £200,000 over 25 years, at an interest rate of 3%, here is how that would look with an interest-only vs. a repayment mortgage:
| Basis | Monthly Payment |
Situation After 25 years
|
| Interest-only | £500 | Owing £200K |
| Repayment | £948 | Owing £0 |
In many cases, it is possible to switch from an interest-only mortgage to a repayment mortgage. However, eligibility and options may vary depending on your lender’s terms and conditions.
Yes, sometimes. In some cases, lenders may allow borrowers to make partial capital repayments during the term of an interest-only mortgage. This can help reduce the outstanding loan balance and potentially mitigate the need to repay the entire loan as a lump sum at the end of the term.
First-time homebuyers may be eligible for an interest-only mortgage, but lenders typically have specific requirements for this type of borrower. They may require a higher deposit, stricter affordability assessments, and additional proof of a solid financial plan to repay the loan at the end of the term.
Yes, there are alternative mortgage options available. One alternative is a part-and-part mortgage, which combines elements of both interest-only and repayment mortgages.
Other alternatives include flexible mortgages or offset mortgages, which allow you to offset your savings against the mortgage balance to reduce the interest charged. You could also consider a 100% LTV mortgage, although these are rare.
