What we cover in this guide
- What is an Interest-Only Mortgage?
- Who might be suited to an interest-only mortgage?
- Try our interest only mortgage calculator
- Differences between interest-only and repayment mortgages
- What happens at the end of an interest-only mortgage term?
- Can all mortgages be placed into interest-only?
- Interest-only mortgage lenders
- Interest Only mortgages FAQs
Who might be suited to an Interest-Only mortgage?
An interest-only mortgage is helpful for individuals with specific borrowing needs. We have seen many different borrowers, including first-time buyers, investors, and people moving homes, benefit from this model.
In expensive areas, an interest-only mortgage is a convenient way to buy a property and help reduce the monthly cost. This is because in many instances, the monthly payments will be cheaper than renting a property. You will also own your home, albeit with a mortgage on it.
Buy-to-Let investors who purchase properties for rental purposes often opt this type of mortgage. This choice allows them to maintain lower monthly expenses. This can assist at times of possible rental voids.
Interest-only mortgages can also present the same attractive low monthly commitments to people whose income may fluctuate. This includes people such as contractors, freelancers and the self-employed. They can pay off parts of the mortgage throughout the term and reduce the total amount.
Interest-Only mortgage advice
If you’re looking for an interest-only mortgage, then it’s likely that you will be facing an uphill struggle to find enough insights on lenders and products to make a truly informed decision. Lenders are cautious, so there is limited public information and few service options available.
A lot of lenders offering these mortgages only work through trusted intermediaries. Often the best deals can be found through specialist mortgage brokers. This means that using a specialist mortgage broker could assist you greatly.
An interest-only mortgage, when managed effectively, can be an excellent way to keep your monthly payments down while storing up an investment for your future.
What is a part-and-part mortgage?
A ‘part-and-part’ mortgage is a way of combining the two methods of payment. With a ‘part and part’ mortgage you pay towards a portion of the loan amount on top of interest payments. You would also arrange a payment vehicle to pay into to cover the balance of the mortgage when it reaches the end of term.
For example, if you take out a mortgage of £160,000 you could have a repayment vehicle covering £100,000. This would be on an interest-only basis. The balance of £60,000 would then be paid off as per a repayment mortgage as part of your monthly payments.
The lender will calculate monthly payments to pay off £60,000 of the mortgage and cover the interest on the remaining amount. At the end of the mortgage period, the loan amount will have reduced from £160,000 to £100,000 and you would pay off this balance using the repayment vehicle.
This provides a convenient compromise between a solely interest-only mortgage or entirely repayment home loan:
- Your monthly payments will be less than the equivalent standard repayment plan.
- You will need less in your repayment vehicle.
- And, because the loan amount reduces during the term of the loan, you will pay less interest than on a fully interest-only arrangement.
The history of Interest-Only mortgages
During the late 1990s and the early 2000s, the high interest rates offered on savings and endowments allowed borrowers to maintain affordable monthly payments and depend on the growth of their endowment plan to fully repay their mortgage by the end of the agreed upon period.
After the financial crisis in 2008-9, interest rates dropped. This caused problems for borrowers who had endowment policies, as they didn’t make as much money as expected. Many homeowners were in financial trouble because their policies couldn’t cover the remaining amount on their mortgages. As a result, interest-only mortgages became less popular, and borrowers started choosing fixed-rate or tracker mortgages for safety.
Most lenders stopped offering interest-free mortgages or made them available only to those who meet strict criteria. This is because there was less demand and higher risks involved.
There are far fewer lenders willing to consider interest-only mortgages than there once were. For a long time, interest-only was a popular option.
Is it possible for me to switch from an Interest-Only mortgage to a repayment mortgage in the future?
Yes, and most lenders will permit borrowers to switch to a repayment mortgage during the term on an interest-only mortgage. You can try to do this by refinancing with your current lender. Alternatively, you can try finding a new lender.
However, this option is only possible if your current mortgage terms allow it. You may also want to consider switching to a ‘part-and-part’ mortgage whereby a portion of the mortgage amount remains interest-only while the remainder is paid off on a repayment basis.
Changing your mortgage in this way is useful for people who can see that their repayment vehicle will not deliver the return expected by the end of term. It’s worth monitoring your fund’s performance regularly to make sure that the finances around your home are on track.
An experienced broker can help you navigate through the necessary steps and make sure you get the best deal possible.
Do I need to have a repayment vehicle in place to have an Interest-Only mortgage?
Yes, lenders must make sure borrowers can afford monthly mortgage payments and have a plan to pay off the full mortgage balance.
You will need to provide verification that you have done so to the lender when you apply for the mortgage and it’s likely that the lender will make checks on the status of your repayment vehicle during the time you are paying off the interest, to make sure that it is on track and their loan is secure.
If you already have an interest-only agreement, you may not have needed to verify it beforehand. This is because the rules used to be less strict. Check if your repayment plan is on track. If you’re worried it won’t cover the mortgage, talk to your lender about what you can do.
Why choose The Mortgage Centres?
Our team at The Mortgage Centres includes specialists are ready to help you. They have decades of experience in interest-only mortgages and an in-depth understanding of the UK mortgage market.
We have close working relationships with a broad spectrum of lenders. Including those on the high-street to niche-market specialist companies. This means that we understand their approach to mortgage applications and their process for assessing whether they will be willing to lend.
It also means that we are able to access better rates for interest-only mortgages than if you had approached them directly yourself. Potentially saving you thousands of pounds in the future.
If you would like to talk to someone about the benefits of an interest-only mortgage, contact our team today.
Interest-Only mortgages FAQs
- Can I sell my mortgaged property to repay the Interest-Only mortgage?
- What happens at the end of the term of the mortgage on an Interest-Only mortgage?
- Do I need to have a repayment vehicle in place to have an Interest-Only mortgage?
- Can all mortgages be placed into Interest-Only?
- Can I change from Interest-Only to a repayment mortgage later on?
If you are already in an interest-only mortgage agreement, then it’s likely that the lender would have ensured you are accruing sufficient funds in an endowment policy or an ISA to pay off the mortgage when it reaches the end of term. However, in some cases the repayment strategy would have been the sale of the property, and if it has increased in value over the period of the mortgage them you will be able to sell it to pay off the loan, and possibly use the profit as a down payment on your next property, or to buy a lower-value property outright.
If you are looking to take out a new interest-only mortgage, then you will face more resistance, as most lenders will not now accept the sale of the property as a valid repayment plan. You will likely be required to show you have an alternative payment plan in place to meet the full mortgage amount, although some lenders might consider it if the loan-to-value ratio is quite low and other aspects of your situation meet their criteria.
Over the course of the mortgage period, you will have been paying off solely the interest on the full mortgage amount each month, so the actual mortgage sum will have remained the same, unless you have also made any capital contributions to reduce it. This sum will need to be paid off in full when the mortgage reaches the end of term, usually from the monies accrued in an endowment policy, ISA, pension, or another investment plan that would have been set up for this express purpose, usually known as a ‘repayment vehicle’. If you find that your repayment vehicle has not returned sufficient funds to cover the full amount of the mortgage, then you may have to sell the property to meet that debt, unless you find another source of finance.
The short answer is yes, you do. Lenders who currently offer interest-only mortgages are obliged by regulations to ensure that borrowers can both afford the monthly payments and have arranged a repayment vehicle that will sufficiently cover the whole balance due at the end of the mortgage period. You will need to provide verification that you have done so to the lender when you apply for the mortgage and it’s likely that the lender will make checks on the status of your repayment vehicle during the time you are paying off the interest, to make sure that it is on track and their loan is secure.
If you are already in an existing interest-only agreement, then it may be that you did not need to provide this verification, as the rules were less stringent in the past. It’s worth checking to make sure that your repayment plan is on track, and if there are any concerns over its ability to cover the mortgage sum you should contact your lender to discuss your options.
It’s not common, but there are a handful of lenders who will accept a borrower switching their mortgage from a repayment plan to interest-only. A lot will depend on your individual circumstances, the loan-to-value ratio and the equity already in the property, and you will certainly need to show that you have an effective repayment vehicle in place to cover the remaining amount due on the mortgage on an interest-only basis. You will need to discuss the exact situation with an experienced mortgage adviser to get an accurate assessment of your options.
This is actually quite possible, and most lenders will permit borrowers to switch their interest-only mortgage to a repayment plan during the mortgage term. You may be able to do this by remortgaging with your existing lender, or by looking for a deal from an alternative lender, if the terms of your existing mortgage allow. You may also want to consider switching to a ‘part-and-part’ mortgage whereby a portion of the mortgage amount remains interest-only while the remainder is paid off on a repayment basis.
Changing your mortgage in this way is useful for people who can see that their repayment vehicle will not deliver the return over time that they expected in order to cover the mortgage amount at the end of term. It’s worth monitoring your fund’s performance regularly to make sure that the finances around your home are on track.
A broker with experience in handling these kinds of issues in the past will be able to comprehensively guide you through all the steps you need to take, and will have the insight to ensure you come away with the most favourable deal possible.