As the name suggests, an interest only mortgage requires that you only pay the interest element of your mortgage in your monthly mortgage repayment. Crucially, there is no repayment of capital during the mortgage term. This has the benefit of reducing your monthly payments, although making the interest-only mortgage payments more affordable now can come with some significant disadvantages further down the line.
When considering an interest-only mortgage, remember that at the end of the mortgage term you will be required to repay the loan capital in full. You therefore need to either make provision for this capital repayment by setting up a separate savings or investment plan. If you can’t do this you will probably need to sell your home to repay the mortgage at the end of the loan period.
Most people are buying a house for them to live in and therefore the need to sell your home at the end of the mortgage term is unlikely to be a sensible or desirable option. You should therefore have a plan for repaying the loan at the end of the term or before. Also, it may be prudent to protect your family by taking taking life insurance to cover the mortgage sum in the event that you were to die, leaving them with a large mortgage still owing on your home.
It should also be noted that with a repayment mortgage over say 25 years, the interest you are paying is calculated every month based on the total outstanding mortgage sum. With a repayment mortgage, the outstanding mortgage sum is reducing over time, slowly at first but faster after the first 5 or 10 years of say a 25 year mortgage term. On an interest-only mortgage the outstanding mortgage sum stays the same throughout the loan term. You will therefore pay more interest on an interest-only mortgage than with a repayment mortgage.
For more information contact us or speak to a mortgage adviser on 01628 507477.
Recent posts
Virgin Money and Hive Energy introduce new "green" mortgage product called Retrofit Boost Mortgage with the aim to help homeowners improve the energy efficiency of their home by offering cashback between £3,000 and £15,000
According to recent findings by LV= where 4,000 UK adults were surveyed, mortgage holders said that were likely to consider equity release to free up some money to take care of expenditures in later life.
A mortgage market rate war
9 Aug 2024
Following the recent decision by the Bank of England’s Monetary Policy Committee to cut the base rate from 5.25% to 5% (the first reduction seen in over four years), we have seen lots of lenders reducing their rates to remain competitive.
August in Bloom: Gardening Tips
7 Aug 2024
Steps for decluttering your home
6 Aug 2024
Did you know that removing clutter within your home can reduce stress, help you be more productive, and improve your mood and self-esteem? Check out our steps to get you started.
61% UK homeowners are looking at equity release
22 Jul 2024
The Equity Release Council has revealed that three in five UK homeowners are interested in releasing money from their property later in life.
Prices for UK houses drop in July 2024
15 Jul 2024
The average seller’s asking price dropped by 0.4% in July, a bigger drop than we have typically seen.
We explore the differences between Millennials and Gen Z and what both generations ideally want from a new home.
More information
Trusted by
