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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, then an interest only mortgage could be right for you. Compare mortgages with us to find a deal that best suits you.

Tobi Owens
From the Mortgages team
minute read
posted 6 JANUARY 2020

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 owe exactly what you borrowed and you’ll have to find a way to pay off this amount. However, they aren’t as common as a standard repayment mortgage given the risk to the bank of getting their money back.

What are the advantages of an interest only mortgage?

  • It has typically low monthly payments.
  • You can use this extra money to invest in the home in order to build its value.
  • If you’re looking to get a buy-to-let mortgage, it’s worth knowing that many buy-to-let landlords have opted for interest only mortgages and then put any profit from rent towards the capital amount. 

What are the disadvantages?

  • 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 rather than gradually chipping away at the money owed. Therefore, only paying interest on an amount that is decreasing over time.  
  • There is no certainty: if it’s an investment there’s no guarantee that it will be enough to pay off the balance and settle the mortgage. You’ll have to have some plan to pay off the balance at the end of the term.
  • The banks deem them to be risky: theoretically it can work well, but as it is fraught with risk and that’s why many banks have stopped offering them. They may insist on you saving to pay the mortgage off at the end of the term in a long-term ISA or a stock market-linked account.  

You should always take expert financial advice if you’re considering taking an interest only mortgage. 

Can I get an interest only mortgage with bad credit?

It’s possible to get an interest only mortgage with bad credit, but it isn’t easy to get a mortgage at all in today’s risk-averse lending system.

A part and part mortgage is a halfway house between an interest only mortgage and a capital repayment mortgage, which may be simpler to qualify for if you have bad credit.  

We don’t offer this type of mortgage online.

This can bring down your monthly repayments but also ensure some of the balance is paid off, so there’s less money to repay at the end of the term. Plus, the interest you owe on the repayment part of the mortgage will lessen over time as the balance decreases.

Compare now

If you’re interested in an interest only mortgage deal then start a mortgage price comparison with us now and see how much you could save! 

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