What is an interest only mortgage?
When you start researching mortgages, you’ll have two different types to choose from: repayment and interest only.
To help with your decision, we focus on the pros and cons of an interest only mortgage, so you can decide if it’s the best type for you.
Interest only mortgages, in a nutshell
When you take out a mortgage, you will need to repay both the value of the loan, plus the added interest over a specific period (usually around 25 years). Interest only mortgages allow you to pay off just the interest, which equates to lower monthly payments as you won’t be paying back the original value of the loan.
However, by the end of the loan period, you will still owe the amount you initially borrowed.
What are the pros of an interest only mortgage?
Here are three main advantages of interest only mortgages:
● In some areas, such as London, interest only mortgage payments are often lower than average rental costs
● Many lenders allow you to switch to a repayment mortgage when the time is right, but make sure you check the small print before signing on the dotted line
● They are often approved by lenders for buy-to-let mortgages
And what about the disadvantages?
Of course, there are some downsides:
● If house prices fall, it may mean the mortgage amount is more than the property is worth
● You’ll end up paying out more in the long-run, as interest is calculated on the full value of your home, whereas repayment mortgage interest is only a percentage of the amount remaining
● Interest only mortgages can be more difficult to find, as not every mortgage lender offers them
Whatever you decide to do, make sure you seek independent advice, take your time before making a choice and make sure you research to find the best possible deal, whether you opt for an interest only or repayment mortgage.
This guide to interest only mortgages was produced in collaboration with L&C, the UK’s leading fee-free mortgage experts.