Interest Only Mortgages

Interest only mortgages may not have enjoyed the best of reputations historically however an interest only mortgage certainly has a place in the right circumstances.

An interest only mortgage is exactly what the name implies. Interest on the loan amount is repaid, not the capital amount of the loan. The amount borrowed is then paid back at the end of the loan. With a repayment mortgage a small amount of the capital is repaid monthly along with the interest on the full amount. Needless to say an interest only mortgage repayment for an equivalent amount borrowed on a repayment mortgage is significantly smaller and more manageable in many cases.

Repayments on an interest only mortgage are often just 50% of the equivalent repayment on a repayment mortgage, making a house purchase much more affordable.

Interest only mortgages were very popular prior to the financial crisis when many people were found to not have the capital at the end of the mortgage term to pay off the loan amount. Endowments were used with strong growth forecasts but many of these underperformed. As a result it is now much harder to get an interest only mortgage unless the deposit is large and planning is in place to settle the mortgage at the end of the agreed loan period. If an interest only mortgage is granted it is usually with the proviso that a repayment plan is in place, for example ISAs or other investments. The lender may periodically ask to check the performance and value of these investments to ensure there will be sufficient capital at the end of the loan period.

People who have an interest only mortgage currently may investigate the opportunities offered by switching to a repayment mortgage or by increasing contributions into an investment plan that will realise sufficient capital upon maturity. Anyone who has an interest only mortgage currently and may be concerned about settling the loan at the end of the loan agreement may consider talking to us about potential courses of action to ensure having viable options available when required.