Interest Only Mortgages
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This is a mortgage where you borrow a lump sum of money and every month the payments that you make only pay the interest charge for borrowing the money and the debt does not actually reduce, so for example, if you borrowed £150,000 over 15 years @ £300pm at the end of the 15 years you would still owe £150,000 as you have only been paying the interest and not the capital. With this type of mortgage, there are advantages and disadvantages laid out below – but the most important aspect is to have a clear repayment strategy of how you intend to actually repay the money you initially borrowed.
What are the advantages of an Interest Only Mortgage?
The main reason clients take out an interest only mortgage is because the monthly payments are lower when compared to a repayment mortgage, however you need to have a clear strategy of how you intend to repay the debt, these include:
- Selling and moving to a smaller cheaper property
- You have other investments which can be used to repay the capital such as a Buy To Let Property, Assets, Stocks & Shares.
What are the disadvantages to an Interest Only Mortgage?
These mortgages are more risky when compared to a repayment mortgage. You need to be fully aware and understand that at the end of the mortgage term the lender will want their money back, so you must ensure you have fully planned for this. This is a mortgage that you need to regularly review and make sure it fits your long term plans. If your repayment strategy fails (i.e. investments go wrong) you may have to sell the property and be aware that if your property value has decreased the mortgage debt you owe maybe more than the property value.
What lenders offer Innterest Only Mortgages?
Some high street lenders offer interest only mortgages, however there is additional criteria you have to pass to be able to qualify, for example, there may be a minimum income you need to be earning or there may need to be X amount of equity within the property to qualify. If you are unable to pass with a high street lender there are specialist lenders available through mortgage brokers who offer a more flexible underwriting criteria.
How long can you have an interest Only Mortgage for?
Lenders generally offer these mortgages up to a term of 30 years. The main driver behind how long you can have the mortgage for will be linked to your income plans – i.e. retirement date and repayment strategy.
Can you change your current repayment mortgage to an Interest Only Mortgage?
There are 2 ways in which you could make this happen. Firstly speak with your existing mortgage lender and see if this is a possibility, Secondly you could arrange a remortgage with another company on an interest only basis. If you go down the remortgage route it is worth speaking with a mortgage broker to get advice on what mortgages are best suited to you.
Are Interest Only Mortgages available to everyone?
Not all lenders offer interest only mortgages. There are some high street lenders that can help and specialist lenders accessible through mortgage brokers. There is always additional criteria that you need to pass such as minimum income, equity within the property and a feasible repayment strategy. If you have bad credit registered such as missed payments, defaults and/or county court judgements there are lenders that do offer bad credit mortgages on an interest only basis.
Are Interest Only Mortgages a good idea?
This really depends upon the applicant’s situation, needs, goals and long term plans. These types of mortgages are more risky when compared to a repayment mortgage, however for some people they are ideal. Having a plausible repayment plan in place to clear the debt is key. You should also review this mortgage regularly to make sure it is still right for you.
What are the disadvantages of an Interest Only Mortgage?
At the end of the mortgage term you will still owe the same amount of money that you initially borrowed, so you have to be fully aware of the risks this brings and have a clear and suitable repayment strategy in place. With these types of mortgages you should regularly review them to make sure they are still suitable for you.
How much deposit do I need for Interest Only Mortgage?
A few lenders appear to accept just a 10% deposit, however the bigger the deposit the more lenders will be available.
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Interest Only Mortgage FAQ’s
This is where the mortgage payments you make only pay the interest charge for borrowing the money and does not pay back any of the capital you initially borrowed. It is extremely important when considering an interest only mortgage that you have a clear and feasible strategy to paying back the capital that you have borrowed. With interest only mortgages you should seek advice from a qualified mortgage broker to review your options.
Mortgage lenders do provide mortgage terms of 25 years for example, however the mortgage term will depend upon your ability to make the monthly payments and how you intend to you repay the capital that you initially borrowed. Instead of a full interest only mortgage, could you afford a repayment mortgage where the capital is being paid back or may be explore the option where part of the mortgage is repayment and another part is interest only? You should seek advice from a qualified mortgage broker to discuss your options in detail.
