A complete guide to interest-only mortgages

Interest-only mortgages are often a popular choice because their monthly repayments are lower than a repayment mortgage.

However, before you make your choice, it’s important to consider the whole picture, to make sure you are making a decision based on all the facts. In this article, our expert team of mortgage advisers at PIL Southampton explains everything you need to know about interest-only mortgages.

What is an interest-only mortgage? 

An interest-only mortgage is a type of mortgage where your monthly payments cover only the interest you owe on the loan. You are not paying back any of the amount you borrowed. So, if you take out a mortgage for £200,000, at the end of your interest-only mortgage term you will still owe £200,000.

How do interest-only mortgages work? 

With an interest-only mortgage, you only pay the interest on the loan, not the loan itself. That means that your monthly payments are generally lower than they would be for a capital repayment mortgage where your monthly payments are a combination of the actual loan and the interest on that loan.

Lenders’ criteria are usually stricter for an interest-only mortgage due to the fact that you need to have a large sum available to pay off your loan at the end of your mortgage term.

This riskier element of an interest-only mortgage also means that you are likely to need a higher deposit, i.e. around 25%, compared to the average 10% deposit requirement for a standard repayment mortgage.

Who are interest-only mortgages for? 

Anyone can apply for an interest-only mortgage, however they are particularly suitable for homeowners who are asset rich, have other investments that they can use to repay the loan on maturity, or for anyone who has a robust repayment strategy in place for when they come to the end of their mortgage term.

Interest-only mortgages are also popular with landlords as the monthly repayments are lower – most buy-to-let mortgages are interest only. And, as they’re not living in the property, it can be more straightforward to sell the property to repay the capital loan when the mortgage term ends.

Retirement interest-only mortgages can be a good option for over 50s who find it preferable to continue living in their home without paying off their mortgage.

Where to find the best interest-only mortgage rates 

A mortgage broker, like our experienced team at PIL Southampton, keeps up to date on all the current deals available. They scour the marketplace and will be able to tell you about the most competitive rates available when you are applying for a mortgage.

They will carefully look at the terms and conditions of each mortgage too, and make sure you know all the details and can be confident that the conditions are right for you.

Pros and cons of interest-only mortgages 

The main advantage of an interest-only mortgage is that your monthly repayments are generally lower as you are only paying the interest. This can make it an attractive option for anyone who is keen to keep their outgoings as low as possible.

Another advantage is that investing the money that you are not using to pay off your mortgage could reap high returns. This could mean that you have more money available to pay off your mortgage quicker.

The key disadvantage of an interest-only mortgage is the fact that you are not paying off your capital loan. This means that, over the long term, you are likely to be paying substantially more interest overall and, crucially, you will need to find a large amount of money to settle your debt at the end of your mortgage term. This could be financially challenging if you don’t have funds in place.

Another downside of an interest-only mortgage is that you are more vulnerable to being in a negative equity position if property prices fall. And, by not paying off any of the capital, you are not increasing your equity in your property.

Risks of interest-only mortgages 

The primary risk of an interest-only mortgage is you not having the funds to pay off the mortgage at the end of your term. If this is the case, the only way you could potentially pay off your mortgage would be by selling your property which could leave you with nowhere to live.

Even if you do sell your property, you may not be able to repay the whole amount if you are in a negative equity situation. 

How a broker can help you secure an interest-only mortgage 

An expert mortgage adviser not only has the skills and knowledge to navigate the range of options offered across the marketplace, comparing interest rates and terms which they can highlight to you, they may also have access to mortgage products that aren’t available on the high street.

They can also work with you to present your income and repayment strategy to meet the lender’s criteria.

How PIL Southampton can help you 

Our independent, expert team of mortgage advisers is here to help you decide the best option for you when it comes to choosing a mortgage, whether that’s interest only or not.

We understand that everyone’s situation is unique and we really care about doing our best to support you through the mortgage application process, guiding you every step of the way. 

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.