An interest-only mortgage is a loan for a property that allows you to pay off just the interest on your borrowing each month, and not the capital. This means that your payments may be lower than on a repayment mortgage however at the end of the mortgage term you will still owe the original loan amount. In comparison to a repayment mortgage, where you pay off both the interest and capital every month, this option enables you to decrease your debt until at the expiration of the term, all money borrowed is paid back in full.

Interest only mortgages on residential properties now come with stricter lending criteria than in the past. This criteria can include a minimum income and minimum equity left in the property, these are usually a lot higher compared to your standard residential mortgage.

Interest only mortgages

If you are looking to apply for an interest-only mortgage, it is important to consider the risks and make sure you understand what is required of you before signing a contract. It is also wise to speak to a specialist mortgage advisor who can help guide you through the process, as well as discuss your financial situation in order to determine if this kind of mortgage loan is best suited to you.

For those considering a potential interest-only mortgage, it is important to understand the risks associated with this type of loan and to plan ahead for how you will cover the total loan cost at the end of your term.

Taking time to research your options and seek advice on which option suits your needs is essential. In this way, you can ensure that the interest-only mortgage loan you take is right for your financial situation and future goals.

Monthly Payments

Furthermore, the payments can be much lower than those on a traditional loan, which allows borrowers to free up more funds for other expenses such as saving, retirement planning, debt paydown, and investing. The principal balance remains unchanged, and the borrower does not make any payments toward it.

However, there are some drawbacks to consider before taking out an interest only mortgage. The biggest disadvantage is you will still owe the full capital you borrowed at the end of the mortgage term. This means you will pay interest on the full amount for the lifetime of the mortgage. This means that, overall, an interest-only mortgage is likely to be more expensive than a repayment loan

There is also no guarantee that interest rates won't increase, which could make it difficult to refinance or even keep up with payments. If rates increase this means you will pay more interest as you pay interest on the full capital.

If you're unable to pay off the mortgage balance by the end of your loan term, it could lead to foreclosure and other serious financial repercussions. Unfortunately, there's a risk that your repayment plan may not generate enough money for you to afford to pay the lump sum. If this happens, then selling your home or finding another way to cover what you owe is likely necessary. There may also be a chance your home may be repossessed.

For these reasons, it is important for potential borrowers to research their options carefully before choosing an interest only mortgage. They should compare loan terms, calculate the total cost of borrowing, and evaluate their ability to pay off the mortgage balance at the end of the loan term.

Advantages and Disadvantages of an Interest Only Mortgage

Positives:

• Cheaper monthly mortgage payments - as you are only paying the interest off of the balance, the monthly payments are lower than on a standard mortgage
• Buy to let landlords - interest only mortgages are more favourable to landlords who rent out a property as the payments are lower which in turn means profit is higher
• Retirement interest only - this keeps the equity in the house if you are remortgaging after retirement
• Budget and invest savings - paying less on your mortgage payments means you can budget and invest the money you have saved

Negatives:

• More expensive commitment overall - this type of mortgage can be more expensive than a capital repayment mortgage as you will have a lump sum to pay off at the end of the term to cover the remaining capital
• Shortfalls - you may need to sell your home or find an alternative way to repay the capital if your chosen repayment vehicle doesn't cover the full loan amount initially borrowed
• High-risk applicant - banks and lenders tend to see this type of mortgage as higher risk due to the lump sum payment at the end of the term, plenty of mortgage providers offer interest only mortgages so there will be options for you

Buy to let interest only

Buy to let interest only is the most common option for landlords. The eligibility requirements for Buy to let interest only are different than residential interest only.  An interest only mortgage is more desirable than a repayment mortgage with landlords as the monthly repayments are lower. This will help if there are any missed rental payments or if the property is empty.

To ensure that you make the best decision for you and your future, it is recommended to consult a financial advisor or professional who can provide insight into all of the consequences associated with this choice. This way, you won't have any surprises down the road when it comes to managing finances.

With today's ever-changing economic conditions, it is important to be informed and make the most suitable decisions about your finances. An interest only mortgage can be a beneficial tool, but it is best to consult with a financial professional to ensure you are making the right decision for your situation. We will compare mortgage deals and set a realistic mortgage term.

If you are looking to speak to a mortgage broker to discuss your mortgage options for your personal circumstances contact us today on 01516620188 or email on [email protected]