Should I get an interest only mortgage

When it comes to applying for a mortgage, you may be faced with a choice between an interest-only deal or a repayment mortgage. A repayment mortgage is the most common option. This is where your monthly payments are split between paying off the interest on your original loan and reducing the loan amount. At the end of your mortgage term, usually 25 years, you’ll have paid off the loan in full and you’ll own your home outright.

An interest-only mortgage works differently.

Instead of gradually paying off your loan, you only pay back the interest on it. This means that at the end of your mortgage term you’ll still owe the initial sum you borrowed, which you’ll be expected to repay in full. For example, if your property cost £250,000 and you paid a £50,000 deposit, at the end of your term you’ll still owe £200,000.

While an interest-only mortgage may seem like a cheaper option when it comes to monthly payments, the main issue comes at the end of your mortgage term – if you can’t repay the loan in full you could end up losing your home.

If you’re considering going down the interest-only route, a repayment plan is essential. For some people this takes the form of investing, whether it be an ISA or savings account, in the hope that they’ll have a big enough pot of money at the end of the term to pay off the outstanding loan. This type of investment strategy can be risky, and the amount of money invested on a regular basis could be equal to the outgoings of a repayment mortgage anyway.

Another option is to hope that the value of your property increases significantly over the course of the mortgage term so that you can sell it and make enough money to pay off your loan and buy another property outright. Again, this is a risky strategy given the unpredictability of the property market.

Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that aren’t available to the public. Mortgage brokers are regulated by the Financial Conduct Authority (FCA) and are required to pass specific qualifications before they can give you advice.

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If you think you’ll struggle to meet your monthly interest-only payments, or if it’s unlikely you’ll have enough money to pay off the loan amount at the end of the term, you should seriously reconsider getting an interest-only mortgage. A mortgage provider will take a good look at your income and outgoings and run a credit check to ensure you can afford your repayments. They’ll also want to know how you intend to pay off the outstanding loan at the end of the term.

You should also avoid using an interest-only mortgage to buy a property that’s out of your price range. Your application will likely be rejected, and even if it is accepted, you could find yourself in financial difficulty when it comes to repaying the loan.

Finally, an interest-only mortgage is not the solution to buying a property if you have a poor credit rating.

If you’ve reached the end of your term and you can’t repay your loan in full you should speak to your lender. They may be able to offer you another interest-only mortgage or switch you to a repayment mortgage.

Yes, although things can get complicated. If you’re switching from interest-only to repayment, you’ll need to show that you can afford the higher monthly payments. If you’re switching from repayment to interest-only, you’ll need to demonstrate to your mortgage provider that you have a plan in place to pay off the loan at the end of the term.

If you reach retirement and still need to pay off your interest-only mortgage, you could choose to switch to a retirement interest-only mortgage. This product works in much the same way; however, the difference is that the loan will only be paid off when you die, move into long-term care or sell your home. This also means any inheritance you plan to pass on will be reduced as the mortgage provider is entitled to the outstanding value of the loan when your property is sold.

Our mortgage calculator helps you see how much your mortgage could cost you each month.

Our how much can I borrow calculator gives you a range of how much a lender might consider lending you under a mortgage. This calculation is an indication only.