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
What is an interest-only mortgage?
An interest-only mortgage differs from a repayment mortgage in a very significant way. With a repayment mortgage, your monthly instalments go towards paying the mortgage amount as well as the interest. Over time, the mortgage payment and interest both decrease over the set period of time until the loan is repaid. This is sometimes referred to as a ‘capital and interest’ mortgage, to differentiate it from an ‘interest-only’ mortgage.
With interest-only, your repayments each month only cover the interest charged on the whole loan amount, so the loan itself does not reduce. The main advantage of interest-only mortgage is that the monthly payments are less than those for a conventional mortgage. However, as the loan isn’t being paid off you will need to pay money into another fund. This is to ensure you will be able to pay the loan off when your mortgage comes to term, if not before.
This kind of plan is often referred to as a ‘repayment vehicle’. Some of the most common repayment vehicles are endowment policies, a pension or an ISA. In other cases, the mortgage is paid off by the sale of the home, which you could have anticipated to have gained value over the course of the mortgage.
Lenders offering interest-only mortgages each have their own criteria for what they are willing to accept as repayment vehicles and may reject those that they think will not give the borrower enough return on their deposits to offer security on the full home loan, one example being cash in a standard savings account. You should always check your plans with an experienced mortgage adviser, or if not, your lender.
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 an 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.
Why choose The Mortgage Centres?
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 an 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.
Our team at The Mortgage Centres includes specialists that 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, Ranging from those on the high-street to niche-market specialist companies, meaning we are able to access the best rates for interest-only mortgages.
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?
- Do I need to have a repayment vehicle in place to have an interest-only mortgage?
- Can I change from interest-only to a repayment mortgage later on?
If you’re in an interest-only mortgage agreement, it’s likely that the lender would have ensured you are accruing sufficient funds in a repayment vehicle.
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 then 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. This is because most lenders won’t 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 mortgage amount.
Although some lenders might consider it if certain aspects meet their criteria, such as a low loan-to-value ratio.
Yes, this is because lenders must make sure borrowers can afford monthly mortgage payments. So, by having a plan to pay off the full mortgage balance helps make this clear to a lender.
You will need to provide verification that you have done so to the lender when you apply for the mortgage. It’s also likely that lenders will make checks on the status of your repayment vehicle during mortgage term. This is to make sure that it’s 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.
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. This is where 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.