Interest only mortgagesÂ
What is an interest only mortgage?
An interest-only mortgage is a loan where you only pay the interest on the amount you borrow each month. The loan amount itself does not change over the course of the loan.
Interest-only mortgages have lower monthly payments than repayment mortgages, because you don’t pay back any of the amount you borrowed – you just pay the interest on the full balance every month. This can be a more comfortable repayment option for clients who are self-employed or receive variable income, such as a bonus or commission.
Typically, interest-only mortgages have the option to overpay the mortgage by 5-10% of the amount outstanding each year. This means that you can still have a reducing balance with an interest-only loan, utilizing variable income to reduce the amount of borrowing. This ensures your lifestyle is not adversely affected and your mortgage is still repaid over time.
It is important to note that interest-only mortgages are not without risks. If you are unable to repay the loan at the end of the term, you may have to sell your home to cover the outstanding balance. Additionally, interest-only mortgages can be more expensive in the long run, as you will pay more interest over the life of the loan.
If you are considering an interest-only mortgage, it is important to speak to a financial advisor to understand the risks and benefits involved.
As Featured In
Would I be eligible?
To determine if you are eligible for an interest-only mortgage, an advisor will need to review your circumstances. Typically, you will need to meet at least one of the following criteria:
- Have a high income
- Have a large deposit
- Be able to demonstrate a clear repayment plan
- Be willing to overpay the mortgage each year
This is not an exhaustive list and the criteria may change over time. It is important to speak to an advisor to find out if you are eligible for an interest-only mortgage.
How is my interest only mortage repaid?
You can overpay most interest only mortgages up to 10% per year without incurring and payment penalties. The payments can be made at any time subject to the limits of the loan. It is important to remember that as the payments above interest are not contractual there is no guarantee that by making your payment each month the loan will be repaid in full at the
end of the term.
Due to the risk of the loan not being repaid in full over the term there are strict regulatory requirements on acceptable ways you can evidence your ability to repay a mortgage. Some of the acceptable methods are detailed below.
– A sole applicant earning over £251,000 is able to arrange interest only based on their income only
– Stocks and shares (traded on an authorised exchange)
– Investment vehicles (Unit trusts, OEICs, ICVCs, endowments)
– Sale of other property (owned in personal name)
This information was correct at the time of writing. Last updated 10/05/23.Â
