Interest Only Mortgages

How does it work?

If you have an interest-only mortgage, you only need to pay interest on your mortgage loan in your monthly payments. You then need to pay back the loan (the original amount lent to you) at the end of the term. This is different from a capital repayment mortgage where you need to pay interest and a part of the initial loan amount every month, so that you have paid back your whole mortgage when you reach the end of the term.

Interest-only mortgages are a riskier type of mortgage, so mortgage providers might impose some limitations for example large deposits. The providers may require that you provide evidence that you have a plan to be able to pay back the entire capital debt at the end of the term. It is crucial to carefully check the provider fees as there could be additional cost involved with an interest-only mortgage.

Pros and Cons of Interest-Only Mortgages

Your monthly repayments will be lower than a capital repayment mortgage. You can decide to change mortgage type and go for a capital repayment mortgage whenever you want. With lower monthly repayments, you will have more money available. You still need to repay the entire capital debt at the end of the term. Compared to a capital repayment mortgage, you will spend additional money on interest. Selling your house at the end of the term may not give you enough funds to pay off the capital debt.

Is it possible to change mortgage type, or do I have to stick to an interest-only mortgage for the entire mortgage term?

Interest-only mortgages are normally better suited for short terms. You can decide to change for a capital repayment mortgage at any time. It is hard for a lot of first-time buyers to afford a mortgage because of high property prices and the deposits (typically 15% of the house value) required by the providers nowadays. If you go for an interest-only mortgage, you will have lower repayments to begin with. When you have more funds available (e.g. with a loan in your monthly payments, whereas with a capital repayment mortgage you repay some of the capital debt every month making interest repayments lower every month.

As a result it is generally a best to go for a capital repayment mortgage after a couple of years. Interest-only mortgage are a good option at the start of term but can cost you a lot more if you decide to keep it for the whole term.

Another approach to interest-only mortgage is to extend the term of the mortgage on a capital repayment mortgage in order to lower the monthly repayments. Although this approach can reduce the repayments, it will increase the total amount of interest you will have to pay as it will take a longer period of time to reimburse the capital debt.

How can I apply for an interest-only mortage?

Fill in the form on this site and an independent mortgage adviser will contact you to answer your questions and give you mortgage advice.