Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be Scamsmart.

keys icon

Should I get an interest only mortgage

piggybank icon

Editorial Team

Moneyfactscompare
Advertisement

young couple having a discussion with a financial advisor

At a glance

  • An interest-only mortgage means you only pay back the interest on your loan
  • This can mean lower monthly repayments
  • At the end of the mortgage term you’ll need to repay the loan in full
  • If you fail to make your monthly repayments, or can’t repay the loan, you could lose your home
  • A repayment plan is essential if you’re considering an interest-only mortgage

What is 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.

Should I get an interest only mortgage?

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.

Should I speak to a mortgage broker?

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.

 

Speak to a mortgage broker today

 

MAB is the preferred mortgage broker of moneyfacts.co.uk

 

Mortgage Advice Bureau logo

Get friendly, expert advice free of charge as a visitor of moneyfacts.co.uk.

Mortgage Advice Bureau have 1,600 UK advisers with 200 awards between them.

Speak to an expert mortgage broker today.

Call 0808 149 9177 or request a callback

Mortgage Advice Bureau offers fee free mortgage advice for Moneyfacts visitors that call on 0808 149 9177. If you contact Mortgage Advice Bureau outside of these channels you may incur a fee of up to 1%. Lines are open Monday to Friday 8am to 8pm and Saturday 9am to 1pm excluding bank holidays. Calls may be recorded.

Your home may be repossessed if you do not keep up repayments on your mortgage.

When to not consider getting an interest only mortgage

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.

What if I’ve already got an interest only mortgage?

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.

Can I switch between interest-only and repayment mortgages?

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.

Retiring with an interest only mortgage

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.

How does a retirement interest only mortgage work?

Find out more about how retirement interest-only mortgages work in our short guide. 

Pros and cons of an interest only mortgage

  • Monthly mortgage repayments are likely to be lower as you'e only repaying the interest, not the capital, of the loan
  • You can invest your money with the aim of paying off the mortgage at the end of its term, or even earlier if your investments perform well
  • You’ll need to ensure you have the money available to repay the loan at the end of the mortgage
  • You'll not be increasing the equity in your home over the mortgage period
  • If you choose a retirement interest-only mortgage it could mean leaving very little or no inheritance behind

Mortgage calculator

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.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

young couple having a discussion with a financial advisor

At a glance

  • An interest-only mortgage means you only pay back the interest on your loan
  • This can mean lower monthly repayments
  • At the end of the mortgage term you’ll need to repay the loan in full
  • If you fail to make your monthly repayments, or can’t repay the loan, you could lose your home
  • A repayment plan is essential if you’re considering an interest-only mortgage

Cookies

Moneyfactscompare.co.uk will, like most other websites, place cookies onto your device. This includes tracking cookies.

I accept. Read our Cookie Policy

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.