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What is an Interest-only Mortgage?

May 17, 2021 by Georgie Kenny

Finding a mortgage that is right for you can be tricky, especially if you want to keep your monthly payments to a minimum. 

That’s where an interest-only mortgage could be your saving grace. It promises low monthly payments, while still allowing you to purchase the home of your dreams. 

If you’re unsure what an interest-only mortgage entails, keep reading!

What is an interest-only mortgage?

A picture of a keys and a mortgage contract

An interest-only mortgage is a loan that allows you to buy a property; much like any other mortgage. 

However, with an interest-only mortgage, you only have to pay back the interest on the money that you’ve borrowed each month. Sounds wonderful, right?

Well, it can be useful. However, you must remember that this type of mortgage means that your monthly payments are not actually paying off your loan. So, at the end of the mortgage term you will have to find a way to pay off the original amount you borrowed, interest free, of course.

How does an interest-only mortgage work?

In short, with an interest-only mortgage, the amount of debt you have stays the same throughout the mortgage term. You pay back your loan at the end of the term, interest free.

What is the difference between a repayment mortgage and an interest-only mortgage?

When you decide to opt for a repayment mortgage, each month you pay back a small part of your loan plus interest. Therefore, by the end of the mortgage term you have paid back the entire loan. 

As previously mentioned, with an interest-only mortgage you only pay back the interest on the loan each month. So, at the end of the mortgage term you must pay back the original loan amount in a lump sum.

What are the advantages of an interest-only mortgage?

A picture of a coins

Interest-only mortgages have several advantages. Firstly, you will have lower monthly payments, as you are only paying back the interest of your loan. Therefore, you have more money to save and, if invested back into your home, you could seriously raise the value. 

What are the disadvantages of an interest-only mortgage?

Unfortunately, an interest-only mortgage can actually cost you more in the long run. This is because with an interest-only mortgage you pay interest on the entire mortgage term. With a repayment mortgage, the amount of interest you pay normally falls over time. 

Lenders believe interest-only mortgages to be much more risky than repayment mortgages, so you may find it difficult to be approved for one. 

How can I get an interest-only mortgage?

In order to apply for an interest-only mortgage you will need to be able to prove that you have a workable repayment plan. 

The way in which you show this could come from ISAs, cash savings or endowment policies. 

Different lenders will have different criteria when it comes to interest-only mortgages, so ensure you understand what these are.

It is always vital to seek financial guidance if you are ever unsure about a mortgage. The longer you leave it, the fewer options you’ll have. Make sure to fully understand the terms of your interest-only mortgage before committing to it. 

May 17, 2021 by Georgie Kenny

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