A guide to interest only mortgages
A guide to interest only mortgages
If you want to buy a property but keep your monthly payments low, an interest only mortgage could be right for you. Compare mortgages with us to find a deal that best suits your needs.
What is an interest only mortgage?
With an interest only mortgage, you only pay back the interest on the money you’ve borrowed each month. At the end of the mortgage term, you’ll still owe exactly what you borrowed, so you’ll have to find a way to pay off this amount. Banks don’t want to put people in a position where they can’t pay back the money they owe, so interest-only mortgages aren’t as common as standard repayment mortgages.
What’s the difference between interest only and repayment mortgages?
With a repayment mortgage, you’re paying off the interest on the loan, as well as a chunk of the amount borrowed. This will make your monthly payments higher, but will also mean you should eventually pay off the loan in full.
With interest-only mortgages, you’re only paying off the interest. That means you’ll pay less each month. But you’ll still have to pay off the full cost of the property at the end of the loan term.
Can I get an interest only mortgage?
Whether or not you’re approved for a mortgage is at the lender’s discretion. But certain factors will make you a more desirable applicant. For example:
- If you have a large deposit or have already built up equity in another property.
- If you have a substantial annual income. If you’re a high earner, this could reassure the bank that you can pay off the final sum.
How much do I have to earn to get an interest-only mortgage?
Getting an interest-only mortgage can depend on lots of factors. For example, the price of the property, how much you want to borrow, your individual circumstances and the lender’s criteria.
Can I make a joint application for an interest only mortgage?
Yes. But you may well find you need a higher joint income to qualify, than if you were applying on your own. However, it might be easier to reach that threshold if you and your partner earn roughly equal salaries.
How big a deposit will I need for an interest only mortgage?
This will vary depending on the lender. But to qualify for an interest-only mortgage, you’ll likely need a higher deposit than you would for a repayment mortgage, as banks consider them a riskier proposition.
To qualify for an interest-only mortgage, you’ll need to prove to your lender that you have a solid repayment strategy. This could come in the form of investments, such as ISAs, or you might have cash in savings or endowment policies. Alternatively, you could sell a holiday home. But property values go down as well as up, so even if you’re able to, you can’t simply rely on selling property.
Different lenders will have different criteria. You’ll need to check that your plan meets the bank’s approval.
Be warned, your lender may regularly check that your repayment plan is still in place. This means that spending your savings once the mortgage is approved, for example, would probably be a bad idea.
What are the advantages of an interest only mortgage?
- Interest only mortgages typically have lower monthly payments than repayment mortgages.
- You can invest these savings in your home and potentially increase its value.
- If you’re after a buy-to-let mortgage, it’s worth knowing that many buy-to-let landlords opt for interest-only mortgages, then put any profit from rent towards the capital amount.
What are the disadvantages of an interest only mortgage?
- It can cost you more in the long run. With an interest only mortgage, you pay interest on the whole amount for the whole term. Repayment mortgages allow you to chip away at the money owed, which means the amount of interest you pay should decrease over time.
- There’s no certainty. If the property is an investment, there’s no guarantee it’ll be worth enough to pay off the balance and settle the mortgage. You’ll need a plan to pay off the balance at the end of the term.
- The banks deem interest-only mortgages risky. That’s why many have stopped offering them. They may insist you save in a long-term ISA or stock market-linked account, to pay off the mortgage at the end of the term.
Always seek expert financial advice if you’re considering taking an interest-only mortgage.
What should I consider if I have an interest only mortgage?
There’s a few things to consider if you already have an interest-only mortgage:
- Can I switch to a repayment mortgage?
If your circumstances change and you find yourself earning more money, it could make sense to switch to a repayment mortgage. If that’s the case, you’ll probably want to look into remortgaging.
- Should I pay into an investment plan?
Investing in stocks, shares or other financial products could be a good strategy for repaying your loan. But there are many products out there and some are riskier than others. Talk to an independent financial advisor before you make any decisions.
- Is it a good idea to make lump-sum repayments?
If you suddenly come into money, it could be a good idea to make a lump-sum payment on your mortgage. However, some lenders may penalise you for doing this, so check any early repayment charges first.
- What are my remortgage options?
It’s often a good idea to switch from an interest only to a repayment mortgage. And the good news is it’s usually a fairly straightforward process. Interest-only mortgages will come with an initial rate, often lasting between two and 10 years. After this, if you don’t remortgage, you’ll be put onto the lender’s standard variable rate, which is likely to be uncompetitive. It’s a good idea to take a look at what’s available before your deal comes to an end.
Can I get an interest-only mortgage with bad credit?
It’s possible to get an interest only mortgage with bad credit, but it’s not easy in today’s anti-risk lending system.
A part and part mortgage is a halfway house between an interest-only mortgage and a capital repayment mortgage. This can bring down your monthly repayments while making sure some of the balance is paid off, which means you’ll have less to repay at the end. If you have a poor credit record, a part and part mortgage may be easier to get. But please note, we don’t compare this type of mortgage at Compare the Market.
If you’re interested in finding the right interest-only mortgage rates for you, start a mortgage price comparison with us now and see if you could save.