What You Need to Know About Interest-Only Mortgages in 2022
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If you’ve created lasting memories in your home, you’re bound to have a hard time letting go; which is probably why you’re keen on finding out about interest-only mortgages!
So, if you’re looking to unlock capital, make relatively smaller monthly repayments, and still retain ownership of your home, then an interest-only mortgage may just be for you.
What You’ll Learn in This Article:
Our dedicated team has spent countless hours researching the market and exploring the options available to you. It’s time to find out what the experts have to say about interest-only mortgages.
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What’s an Interest-Only Mortgage?
An interest-only mortgage is a type of loan secured against your property, where your monthly repayments are only of the interest portion.
The capital amount is only repaid as a lump sum at the end of the mortgage term.
How Do Interest-Only Mortgages Work?
Interest-only mortgages work by providing you with the option to pay the interest portion back at either a fixed or variable rate.
At a fixed rate, the monthly repayment is locked and doesn’t change for the duration of the mortgage term.
On the other, a variable rate means that you’re subjected to fluctuations and your monthly repayment could decrease or increase, depending on market conditions.
Can I Get an Interest-Only Mortgage?
Yes, you can get an interest-only mortgage if you meet the stringent qualification criteria.
The bar is relatively higher for interest-only mortgages, and you need to have a considerable deposit and clear repayment strategy.
How Much Can I Borrow on an Interest-Only Mortgage?
You can borrow between 60% and 75% (LTV) of the property value on an interest-only mortgage, in most cases.
However, for a more accurate and tailored answer, you can use an interest-only mortgage calculator or consult a reputable financial advisor.
How Much Do I Have to Earn to Get an Interest-Only Mortgage?
You have to earn enough to qualify for an interest-only mortgage and cover the deposit requirements, depending on the value of your property.
Lenders may require proof of a stable source of income, to ensure that you don’t default on any repayments.
How Big a Deposit Will I Need for an Interest-Only Mortgage?
The deposit you’ll need for an interest-only mortgage varies per lender.
However, it’s usually 25% or more, and could go up to as much as 50% of the property value.
Although, some lenders may accept a 15% deposit.
The deposit requirement for an interest-only mortgage is typically higher than other mortgages.
Can I Make a Joint Application for an Interest-Only Mortgage?
Yes, you can make a joint application for an interest-only mortgage.
Can I Get an Interest-Only Mortgage With Bad Credit?
Yes, you can get an interest-only mortgage with bad credit.
We advise that you use a mortgage broker to help you find a willing lender.
How Can I Find Out What Interest-Only Mortgage I Can Afford?
You can find out what interest-only mortgage you can afford by consulting a credible financial advisor who will assess your circumstances.
You can also make use of our interest-only mortgage calculator.
How’s the Capital Repaid?
The capital is repaid as a lump sum at the end of the mortgage term.
The only monthly repayments you make are of the interest portion.
Will My Repayment Plan Be Checked?
Yes, your repayment plan may be checked by your lender during the mortgage term.
This is to endure that you’re on track to cover your mortgage by the end of the agreement period.
What Are the Options When You Reach the End of the Term?
When you reach the end of the term, you have to pay back the capital portion of the mortgage.
The interest should already be fully repaid at this point.
To confirm the amount due to you, you can request a redemption statement from your lender.
What Are the Acceptable Repayment Strategies?
The acceptable repayment strategies for an interest-only mortgage include using your savings.
Here’s more details.
Using Savings & Investments
Throughout the agreement term, you could put some money into a savings account or ISA.
Switching to a Repayment Mortgage
By switching to a repayment mortgage, you can start paying off the capital portion as well.
This means that you’ll start paying it off monthly, as opposed to having to pay a lump sum of the capital portion at the end of the term.
Using a Tax-Free Lump Sum From Your Pension
You can cash in on your pension, with 25% of it being payable to you as a tax-free lump sum.
Selling Your Property
In some cases, when you sell your property to repay the interest-only mortgage, its market value will have increased.
This means that proceeds from the sale may be enough to repay the capital portion, and possibly leave you with a bit of excess funds.
This is especially true in the case of a buy-to-let property.
Retirement Interest-Only (RIO) Mortgages
Once you’re of retirement age, an RIO can be used to unlock capital from your property.
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Is There a Minimum Value for My Repayment Strategy?
Yes, some lenders may stipulate a minimum value for your repayment strategy.
The minimum value typically differs per lender, so we recommend checking this with your chosen finance provider.
Do I Need a Repayment Strategy for a Buy-To-Let?
Yes, you do need a repayment strategy for a buy-to-let.
In fact, some lenders may want to see the repayment strategy before they even consider entering into the agreement.
What Can I Afford to Borrow on Interest-Only?
What you can afford to borrow on an interest only can be discovered by your using our FREE interest-only mortgage calculator.
No 2 circumstances are the same, so you consult a financial advisor for an accurate calculation.
What if I’m Struggling With My Repayment Plan?
If you’re struggling with your repayment plan, you have to communicate this with your lender.
By letting your lender know before the end of your agreement term, an alternative arrangement can be made.
What if I Can’t Repay the Capital at the End of the Term?
If you can’t repay the capital at the end of the term, you can ask your current lender to extend the mortgage.
Alternatively, you could remortgage to a new lender.
Consider Part Repayment & Part Interest-Only
A part & part mortgage is considered the middle ground between an interest-only mortgage and a repayment mortgage.
With this option, you agree to repay an interest portion and a capital portion.
This ultimately reduces the capital that you’ll have to pay at the end of the agreement term.
Mortgage Repayment Calculator
Use our mortgage repayment calculator to get an estimate of how much you can unlock and what your monthly repayments will be.
What Are the Pros & Cons of Interest-Only Mortgages?
The pros and cons of interest-only mortgages include that you only have to pay off the interest portion, but a higher deposit is required.
Here’s more details.
Pros of Interest-Only Mortgages
Additional interest-only mortgage pros include:
- Lower monthly repayments, as you’re only paying off the interest portion.
- You can switch to a repayment mortgage if you’re able to make higher monthly repayments.
- You’re at liberty to make overpayments.
- The capital portion that isn’t repaid each month can be invested to be used on other needs.
- You could use the money saved each month for home improvements to increase the value of your home.
- You can buy a bigger home than you would’ve been able to afford otherwise.
Cons of Interest-Only Mortgages
Some cons of interest-only mortgages are:
- A higher deposit is required.
- Repayment is delayed as the full capital portion is still payable at the end of the term.
- There are limited interest-only mortgage options to choose from.
- The qualification criteria are stringent.
Is It Suitable for Me?
Yes, an interest-only mortgage is suitable for you if you can afford the initial deposit and monthly repayments.
It’s also suitable for you if it’s for a buy-to-let property, which could be sold at a profit at the end of the term.
How to Choose the Best Interest-Only Mortgage for You
To choose the best interest-only mortgage for you, we recommend comparing deals from the best providers.
You can also use a broker to search the market for the most suitable deals.
How Do I Apply for an Interest-Only Mortgage?
You can apply for an interest-only mortgage directly with the providers on the market.
Alternatively, you could opt to apply through a reputable broker who will search for the best deals for you.
The deals presented to you will be dependent on factors such as your age, property value, income, savings, expenses, and debt, among other things.
Some lenders may also prefer to only deal with brokers or intermediaries.
Do I Need Advice Before Applying for an Interest-Only Mortgage?
Yes, you do need advice before applying for an interest-only mortgage.
Making such a huge financial decision must not be done on a whim.
Alternatives to Interest-Only Mortgages
Alternatives to interest-only mortgages include:
- Equity release
- Lifetime mortgage
- Selling your property
How Much Are Interest-Only Mortgage Interest Rates?
Interest-only mortgage interest rates differ across lenders.
However, you can expect interest rates from 3.65% to 5.7%.
Does How Much I Can Borrow on an Interest-Only Mortgage Depend on My Age?
Yes, how much you can borrow on an interest-only mortgage does depend on your age.
However, there are several other factors that are taken into consideration, such as the property value and purpose, your income, as well as your expenses.
Can I Pay Interest-Only on My Mortgage as a Second Home?
Yes, you can pay interest-only on a mortgage on a second home.
This is only possible if you’ve lived in the residential property for a certain amount of time, don’t rent it out, and don’t use it for business purposes.
Can I Pay off an Interest-Only Mortgage Early?
Yes, you can pay off an interest-only mortgage early.
In some cases, you may not even be subjected to an early repayment charge.
What’s the Difference Between Interest-Only & Capital Repayment Mortgages?
The difference between interest-only and capital repayment mortgages is that the monthly repayment for the former is only the interest portion.
For the latter, you pay off the capital each month and don’t have to wait to pay it off as a lump sum at the end of the term.
Can I Change My Interest-Only Mortgage to Capital Repayment?
Yes, you can change your interest-only mortgage to a capital repayment mortgage.
By speaking to your lender, you’ll be able to make the switch and start paying off the capital portion of the mortgage as well.
Can I Change My Mortgage to Interest-Only?
Yes, you can change your mortgage to interest-only, provided that your lender agrees.
Your lender may want to do additional checks to ensure that they’ll get their money back.
Is It Possible to Increase My Interest-Only Mortgage Term?
Yes, it’s possible to increase your interest-only mortgage term, provided that you speak to your lender.
While it’s not always guaranteed, you should raise the matter if you’re concerned that you may not be able to pay your mortgage off per the agreement.
Interest-only mortgages are still a viable way to unlock funds if you’re looking for a minimal monthly repayment.
Despite the stringent qualification criteria and deposit requirement, you stand to gain if you sell your property at a profit at the end of the loan term.
Get the best offer for you by comparing deals from the top reputable providers of interest-only mortgages, and be on your way to financial freedom.
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