Paying off just the interest in with mortgage payments, for a set period, is a great way for homeowners to increase cashflow. There are many interest-only mortgages on the market, which offer different ways of making up the full sum of the loan when the mortgage term is complete.
Find out more about interest only mortgages and how they work.
An interest only mortgage is where the borrower takes out a loan for a home and pays off just the interest every month. The ‘capital’ portion (i.e. the money used to purchase property) is paid in full at the end of the mortgage term. A typical mortgage term length could be anything from 20-30 years.
As mentioned previously, you will need to make every monthly mortgage interest payment. Also, you will need to set up a ‘repayment vehicle,’ which your lender agrees will make a credible form of payment for the mortgage capital at the end of the mortgage term. Examples of credible repayment vehicles include;
In terms of the interest rate itself, you can choose deal which pays interest at a fixed, tracker or discount rate. See our Guide to Mortgage Types for more information.
Please note: Some mortgage plans can be repaid on a part interest only, part repayment basis.
Jason and Camilla took out a £100,000 mortgage with a 25-year term, paying interest only at a rate of 5%.
If they had taken out a standard repayment mortgage, for the same amount at the same interest rate, their payments per month would have been £591.27. Currently, their deal puts their payments at 416.66 per month. At the end of the mortgage deal, they would have paid approximately £47,000 more in interest than if they had gone with a repayment deal from the start.
However, as Jason anticipates that his income will rise in a few years’ time, they instead decide to stick with interest only payments for two years and then remortgage to a fixed repayment plan.
Repayment Mortgage – Taking out a mortgage where the capital is repaid over time could be a safer bet for those who fear their investments and/home sale will result in a mortgage shortfall at the end of the mortgage term. You can then choose to pay interest at a fixed, capped, discounted, tracker or standard variable rate.
Offset Mortgage – This is where funds used in a savings account can be ‘offset’ against the interest owed on a mortgage loan. For example, if the mortgage was £300,000 and you had £50,000 of savings in an offset account, you would pay interest on £250,000 of the loan rather than the full £300,000.
If you need advice before applying for an interest only mortgage, get in touch with an independent mortgage broker. They can help you weigh up your options and find the best deal for you with free, no-obligation quotes. Contact a mortgage broker to get started.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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