Interest Only Mortgage Advice
With our team of experienced brokers who specialise in interest-only mortgage lending, we can access the whole of the UK mortgage market to help you find the right deal. In many cases, our ongoing working relationships with specialist lenders means we may be able to access better interest-only mortgage rates than if you approached lenders yourself. For more information, please contact our team to discuss the benefits of interest-only mortgages and how we can help you secure the mortgage that is right for you.
What is an Interest Only Mortgage?
An interest-only mortgage is a home loan where your monthly mortgage payments only cover the interest you are being charged on the total amount you have borrowed (the capital); this differs from a repayment mortgage, in which your monthly mortgage payments are calculated to cover both the loan interest, and repayment of the amount borrowed over the agreed repayment term. Repayment mortgages are sometimes referred to as “capital and interest” mortgages, to differentiate them from interest-only mortgages.
With an interest-only mortgage, as you are not repaying any of the mortgage debt itself, the monthly interest-only repayments can be significantly lower than they would be for a repayment mortgage of the same amount. However, you will need to have a plan – sometimes referred to as a “repayment vehicle” – in place to repay the total balance of the mortgage on or before the end of your repayment term.
Examples of repayment vehicles can include endowment policies, pensions, ISAs or the sale of the property itself. Lenders who offer interest-only mortgage products will each have their own policies on what types of plans and investments they are willing to accept as repayment vehicles. Cash in a savings account, for example, may not be acceptable to some lenders as a repayment vehicle for an interest-only mortgage.
Differences Between Interest Only and Repayment Mortgages
Interest-only mortgages have the benefit of lower monthly payments than on a repayment mortgage of the same amount; that is because the payment only covers the interest, and does not repay any of the mortgage capital over the term. However, because the balance is not reducing, the total interest charged over the life of the mortgage is more than on an equivalent repayment mortgage.
There can be hundreds of different mortgage deals on the market at any given time, but here we will look at representative interest rates of 3%, 4% and 5% to illustrate how an interest-only mortgage and a repayment mortgage would compare. Our examples are based on a purchase price of £232,000 with a 25% deposit put down and mortgage borrowing of £174,000, taken out for a 25-year term.
This should not be considered as mortgage advice. The figures may differ depending on different factors. Always seek advice from a mortgage specialist for an accurate comparison.
|Interest Rate||Interest-Only Mortgage||Repayment Mortgage|
|3%||At an interest rate of 3%, the interest-only mortgage payment would be £435.
The total amount repayable over the term would be £304,500, which includes:the £174,000 borrowed, which needs to be repaid at the end of the term, and;total interest of £130,500, paid in equal monthly payments over 25 years.
|At an interest rate of 3%, the repayment mortgage payment would be £825.
The total amount repayable over the term would be £247,538, which includes:the £174,000 borrowed, which is repaid by the monthly payments over 25 years;total interest of £73,538, paid as part of the monthly payments over 25 years
|4%||At an interest rate of 4%, the interest-only mortgage payment would be £580.
The total amount repayable over the term would be £348,000, which includes:the £174,000 borrowed, which needs to be repaid at the end of the term, and;total interest of £174,000, paid in equal monthly payments over 25 years.
|At an interest rate of 4%, the repayment mortgage payment would be £918.
The total amount repayable over the term would be £275,531, which includes:the £174,000 borrowed, which is repaid by the monthly payments over 25 years;total interest of £101,531, paid as part of the monthly payments over 25 years.
|5%||At an interest rate of 5%, the interest-only mortgage payment would be £725.
The total amount repayable over the term would be £391,500, which includes:the £174,000 borrowed, which needs to be repaid at the end of the term, and;total interest of £217,500, paid in equal monthly payments over 25 years.
|At an interest rate of 5%, the repayment mortgage payment would be £1,017.
The total amount repayable over the term would be £305,156, which includes:the £174,000 borrowed, which is repaid by the monthly payments over 25 years;total interest of £131,156, paid as part of the monthly payments over 25 years.
The calculations assume a constant interest rate, and do not include any other factors such as home insurance, redundancy insurance or payments towards a repayment vehicle.
What is a part-and-part mortgage?
As the name perhaps suggests, a “part-and-part” mortgage is part repayment and part interest-only. With this type of mortgage, you would have a repayment vehicle that only covers part of the total mortgage debt. For example, let us say you take out a £100,000 mortgage, but only have a repayment vehicle covering £75,000. In this case, £75,000 of the mortgage would be on an interest-only basis, and the remaining £25,000 would be on a repayment basis.
Your monthly mortgage payment would be calculated to cover the interest accruing on the entire mortgage capital, plus a proportion to repay the £25,000 repayment portion over the agreed repayment term. At the end of the mortgage term, your mortgage balance will have been reduced from £100,000 to £75,000, which will then be paid off by the appropriate repayment vehicle.
Part-and-part mortgages offer a middle ground between a full repayment mortgage and a full interest-only mortgage. The monthly payments are lower than on an equivalent repayment mortgage, and because part of the mortgage balance is being repaid over the term, you pay less total interest than you would on an interest-only mortgage.
Who might be suited to an interest-only mortgage?
Interest-only as a mortgage repayment method can be suitable for all types of borrowers, from first-time buyers and home movers, to buy-to-let investors and those looking to remortgage. An interest-only mortgage is not right for everyone – and some lenders do not offer interest-only mortgages at all – however, this type of mortgage can be advantageous for many reasons when individual borrowing needs and personal circumstances are taken into consideration.
In areas where house prices are high, such as in London and the South-East, buying a property with an interest-only mortgage can be seen by some as a cheaper option than renting a property. There is also the view of certain home buyers that, while you may not be paying off the actual capital of the loan, you are on the property ladder and you do own your own home.
Many buy-to-let investors use interest-only mortgages because it enables them to keep their monthly mortgage commitment to a minimum – thereby maximising their monthly rental yield – whilst opting to make lump-sum part repayments towards the mortgage capital at periods throughout the loan if required. An interest-only mortgage can also reduce the monthly cost of property ownership if the investor is looking primarily for capital growth rather than longer-term income.
The benefits of interest-only mortgages can also apply to the self-employed, contractors, freelancers, and others who may have irregular monthly income. In this case, the lower monthly interest-only repayments can help when budgeting.
Interest Only Mortgage Lenders
For many years, interest only has been a popular mortgage repayment method, especially when endowments were seen by borrowers as an efficient way to repay the mortgage in full when it came to term. However, the market in Interest Only mortgages declined after the plunge in interest rates which meant that the expected growth in many endowment policies did not meet the sum owed on the mortgage, leaving a large number of homeowners in financial difficulty.
The popularity of interest only mortgages understandably declined, with borrowers increasingly opting for safer repayment mortgage products, either fixed-rate or tracker. Lenders also perceived interest only mortgages as a far greater risk than previously, and this, coupled with the drop in demand, led many lenders to either restrict their availability, or withdraw from the interest only market altogether.
However, interest only mortgages are still available through a number of specialist lenders in the market, although access to their products will be subject to certain minimum standards and criteria. If you can show that you have made arrangements for alternative methods of funding and will have the ability to repay the mortgage on a future date, and can also supply a reasonable deposit on the mortgage and meet any other criteria required by the lender, then this could still be an option open to you.
These specialist lenders typically only work through an intermediary, such as a specialist mortgage broker, and do not advertise on the high street. If you want to find out more about your options for an interest-only mortgage, and if it is the most suitable solution for your needs, please talk to one of our expert team members.
INTEREST ONLY MORTGAGE ADVICE
If you are looking to take out an interest-only mortgage, then it is vitally important to expert professional advice on your plan, even if you are supremely confident that this is the right option for you. An interest-only arrangement can seem very attractive in the immediate circumstances, with its cheaper monthly payments, and can be a very effective way to keep your ongoing costs down while maintaining a growing asset or storing up an investment for the future.
However, you have to be absolutely certain that you will be able to repay the loan when it comes to term. Lenders will require you to have an acceptable ‘repayment vehicle’ in place before they can accept your application. This could be a pension, endowment policy, ISA or other investment fund that accrues interest, or perhaps you will simply plan to sell the property, assuming that it will have held its value throughout the duration of the loan. This entails an element of risk, as many historic holders of interest-only mortgages with insufficient endowment
With access to over 12,000 mortgage products via over 90 lenders, we are confident that we will be able to match you with the right mortgage to meet your needs, and will give you all the reasons why we know a particular interest only mortgage will work for you. Get in touch today to arrange a free, no-obligation initial discussion, and we’ll give you a clear picture of all your options going forward.
- - Can I sell my mortgaged property to repay
the interest-only mortgage?
- - What happens at the end of the term of
the mortgage on an interest
- - Do I need a repayment vehicle in place to
have an interest-only mortgage?
- - Can all mortgages be placed onto
- - Can I change from interest-only to
a repayment mortgage later on?