Interest Only Mortgages Explained

What is an interest only mortgage?

This type of mortgage does what it says on the tin. Each month, you’ll only pay the interest rate on your mortgage. The property capital will need repaying at the end of a set term (usually about 25 years) with money saved. This will repay the entire loan in one go, and you’ll own your home outright. This type of mortgage is more difficult to get than many others, so speaking to a mortgage broker may help your chances of success. They’ll know exactly what each lender requires to be accepted for an interest only deal. Many lenders do not even offer it as an option.

Why would you choose an interest only mortgage?

Interest only deals are riskier than traditional repayment mortgages. You must be sure you’ll have the money to pay back the entire loan when your repayment time comes. It may be that you’re going to come into a large sum, e.g. from an investment policy, or can save enough money by the repayment date. To have your application accepted, you’ll need to convincingly show lenders how you intend to raise enough capital to repay the loan. This will require a solid plan in place to raise the capital needed and shouldn’t rely on factors such as inheritance or future work bonuses. This type of mortgage is often popular with landlords who want a buy to let mortgage.

Pros and cons of interest only mortgages

The good thing about interest only mortgages is that monthly repayments will be lower, as you’re only paying the interest rate. However, you’re not actually paying any of the loan off, so if for some reason you’re unable to repay the capital at the end of the term, you may have to sell your home and be no better off than when you first took out the mortgage. As time goes on, you may be able to switch to a repayment mortgage if you feel this is more appropriate.

Remortgaging

If your home has increased in value, you may be able to pay off the loan by remortgaging your property. However, it isn’t a guaranteed method, so don’t rely on this as a way of repaying your debt.

When looking to apply for any type of mortgage, getting professional, impartial advice can help you get the best mortgage product for you. Find a trusted mortgage adviser in your local area here.

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