At Barlow Irvin, we have years of experience helping homeowners choose the right mortgage product for them. For many, this is an interest-only mortgage.
In this guide, we’ll discuss what an interest-only mortgage is, the pros and cons of it and what you should check before getting this type of mortgage product.
Key Points:
- An interest-only mortgage is when you only repay the interest on your loan
- The most common use of an interest-only mortgage is for buy-to-let properties
- Interest-only mortgage aren’t for everyone, which is why you may need a mortgage broker to help you decide whether or not it is suited for you
What is an interest-only mortgage?
An interest-only mortgage is a type of mortgage product in which you only pay the interest each month on the amount you borrowed.
This differs from the standard repayment mortgage, where you pay back both the interest and some of the loan each month.
How does an interest-only mortgage work?
If you take out an interest-only mortgage, you will still be charged monthly payments by your lender, but they will only be the agreed interest rate. This means the repayments will be smaller since you won’t be paying back the actual loan amount.
However, these payments do not reduce the size of the loan. Instead, they will just pay off the interest so the loan sum won’t grow any bigger.
For example, if you borrow £200,000 on a 20 year interest-only mortgage, once the 20 years have past, you will still owe £200,000. At this point you will still need to repay the amount borrowed, either by selling the property, using savings or by remortgaging.
How do you calculate interest-only mortgage payments?
Calculating your interest-only monthly repayments is quite simple since it is just the interest on the total sum.
For example if you borrow £200,000 on a 5% mortgage, your annual interest rate will be £10,008. This means your monthly repayments will be £834.
Over 20 years, this will mean you will pay around £200,000 in monthly payments. You then must also pay the £200,000 from the original mortgage loan, making it a rough total of £400,000.istory. This makes it much easier to apply for mortgages, as well as improving your credit rating.
Pros and cons of interest only mortgages
Like any type of mortgage product, it is important to consider the pros and cons.
The pros of interest-only mortgages
The main and probably most appealing benefit of interest-only mortgages is that the monthly repayments are cheaper than repayment mortgages and so you may be able to borrow more.
This is also useful for those who are purchasing a buy-to-let property, as it keeps your costs lower and when the term expires, you can just sell the property to repay the loan.
The cons of interest-only mortgages
The biggest drawback of interest-only mortgages is that you do not pay any of the loan back as you go. This means you have to find another way to do this when the mortgage term is over.
Another disadvantage is that the total amount you repay over time will end up being higher than a repayment mortgage.
It can also be harder to find deals, especially for first-time buyers. You will likely need a bigger deposit and a higher income, which can cancel out the benefits of having cheaper repayments.
What should you check before applying for an interest only mortgage?
Before you commit to getting an interest only mortgage, there are a few things you should check:
- The different types of mortgages – Interest-only mortgages aren’t right for everyone, which is why it is important to check other avenues before you commit. Using a mortgage broker, such as ourselves at Barlow Irvin, is a great way to establish what kind of mortgage product is best for you.
- Can you make a repayment plan? – With an interest-only mortgage, it is vital that you have a repayment plan in place for when your mortgage term is over. Your lender will likely want to see this or know what your plan is when you take the mortgage out.
- Check your credit score – When you apply for a mortgage, lenders will check your credit report. If you have a good report and no issues are flagged, your mortgage application should be successful.
- Can you afford the monthly repayments? – You can use a mortgage calculator to check how much your monthly payments will likely be, whether that is interest-only or repayment mortgages. Your mortgage broker will also be able to help you with this.
Can you switch from an interest-only to a repayment mortgage?
Yes, you can switch from an interest-only mortgage to a repayment mortgage, either by remortgaging or by product transfer.
Our team will be able to help you find the best value deal for your budget if you do wish to switch products.
Can you extend your interest only mortgage term?
Whether you can extend your interest-only mortgage term really depends on your lender, although most lenders will be open to extending the term if you speak to them as soon as possible.imited.