Interest Only Mortgage
At Ideal Home Loans, we have a great team experienced brokers who specialise in interest-only mortgage lending. We can access the whole of the UK mortgage market to help you find the right deal.
Interest Only Mortgage Advice
At Ideal Home Loans, we have a great team experienced brokers who specialise in interest-only mortgage lending. We can access the whole of the UK mortgage market to help you find the right deal. In many cases, our ongoing working relationships with specialist lenders means we may be able to access better interest-only mortgage rates than if you approached lenders yourself. For more information, please contact our team to discuss the benefits of interest-only mortgages and how we can help you secure the mortgage that is right for you. We offer free interest only mortgage advice in Westbury, Wiltshire and nationwide also.
What is an Interest Only Mortgage?
An interest-only mortgage is a home loan where your monthly mortgage payments only cover the interest you are being charged on the total amount you have borrowed (known as the capital); this differs from a repayment mortgage, in which your monthly mortgage payments are calculated to cover both the loan interest, and repayment of the amount borrowed over the agreed repayment term.
Another term you might see to describe a repayment mortgage is “capital and interest” mortgages, to differentiate them from interest-only mortgages.
With an interest-only mortgage, as you are not repaying any of the mortgage debt itself, the monthly interest-only repayments can be significantly lower than they would be for a repayment mortgage of the same amount. As stated, this is because you’re not paying anything off the capital that you’ve borrowed. So, you will need to have a plan – sometimes referred to as a “repayment vehicle” – in place to repay the total balance of the mortgage on or before the end of your repayment term.
Repayment vehicles can include endowment policies, pensions, ISAs or the sale of the property itself. Lenders who offer interest-only mortgage products will each have their own policies on what types of plans and investments are acceptable as repayment vehicles. Cash in a savings account, for example, may not be acceptable to some lenders as a repayment vehicle for an interest-only mortgage. With so many options our free interest only mortgage advice can help.
Differences Between Interest Only and Repayment Mortgages
Interest-only Wiltshire mortgages have the benefit of lower monthly payments than on a repayment mortgage of the same amount; that is because the payment only covers the interest and does not repay any of the mortgage capital over the term. However, because the balance is not reducing, the total interest charged over the life of the mortgage is more than on an equivalent repayment mortgage.
There can be hundreds of different mortgage deals on the market at any given time, but here we will look at representative interest rates of 3%, 4% and 5% to illustrate how an interest-only mortgage and a repayment mortgage would compare. Our examples are based on a purchase price of £232,000 with a 25% deposit put down and mortgage borrowing of £174,000, taken out for a 25-year term.
|Interest Rate||Interest-Only Mortgage||Repayment Mortgage|
|3%||At an interest rate of 3%, the interest-only mortgage payment would be £435.|
The total amount repayable over the term would be £304,500, which includes:the £174,000 borrowed, which needs to be repaid at the end of the term, and;total interest of £130,500, paid in equal monthly payments over 25 years.
|At an interest rate of 3%, the repayment mortgage payment would be £825.|
The total amount repayable over the term would be £247,538, which includes:the £174,000 borrowed, which is repaid by the monthly payments over 25 years;total interest of £73,538, paid as part of the monthly payments over 25 years
|4%||At an interest rate of 4%, the interest-only mortgage payment would be £580.|
The total amount repayable over the term would be £348,000, which includes:the £174,000 borrowed, which needs to be repaid at the end of the term, and;total interest of £174,000, paid in equal monthly payments over 25 years.
|At an interest rate of 4%, the repayment mortgage payment would be £918.|
The total amount repayable over the term would be £275,531, which includes:the £174,000 borrowed, which is repaid by the monthly payments over 25 years;total interest of £101,531, paid as part of the monthly payments over 25 years.
|5%||At an interest rate of 5%, the interest-only mortgage payment would be £725.|
The total amount repayable over the term would be £391,500, which includes: the £174,000 borrowed, which needs to be repaid at the end of the term, and;total interest of £217,500, paid in equal monthly payments over 25 years.
|At an interest rate of 5%, the repayment mortgage payment would be £1,017.|
The total amount repayable over the term would be £305,156, which includes: the £174,000 borrowed, which is repaid by the monthly payments over 25 years; total interest of £131,156, paid as part of the monthly payments over 25 years.
The calculations assume a constant interest rate, and do not include any other factors such as home insurance, redundancy insurance or payments towards a repayment vehicle.
What is a part-and-part mortgage?
As the name perhaps suggests, a “part-and-part” mortgage is part repayment and part interest-only. With this type of mortgage, you would have a repayment vehicle that only covers part of the total mortgage debt. For example, let us say you take out a £100,000 mortgage, but only have a repayment vehicle covering £75,000. In this case, £75,000 of the mortgage would be on an interest-only basis, and the remaining £25,000 would be on a repayment basis.
Your monthly mortgage payment would be calculated to cover the interest accruing on the entire mortgage capital, plus a proportion to repay the £25,000 repayment portion over the agreed repayment term. At the end of the mortgage term, your mortgage balance will have been reduced from £100,000 to £75,000, which will then be paid off by the appropriate repayment vehicle.
Part-and-part mortgages offer a middle ground between a full repayment mortgage and a full interest-only mortgage. The monthly payments are lower than on an equivalent repayment mortgage, and because part of the mortgage balance is being repaid over the term, you pay less total interest than you would on an interest-only mortgage.
Who might be suited to an interest-only mortgage?
Interest-only as a mortgage repayment method can be suitable for all types of borrowers, from first-time buyers and home movers, to buy-to-let investors and those looking to remortgage. An interest-only mortgage is not right for everyone – and some lenders do not offer interest-only mortgages at all – however, this type of mortgage can be advantageous for many reasons when individual borrowing needs and personal circumstances are taken into consideration.
In areas where house prices are high, such as in London and the south east, buying a property with an interest-only mortgage can be seen by some as more affordable than renting a property. There is also the view of certain home buyers that, while you may not be paying off the actual capital of the loan, you own your own home and that may be important to you.
Many buy-to-let investors use interest-only mortgages because it enables them to keep their monthly mortgage commitment to a minimum – thereby maximising their monthly income from their properties – whilst opting to make lump-sum part repayments towards the mortgage capital at periods throughout the loan if required. An interest-only mortgage can also reduce the monthly cost of property ownership if the investor is looking primarily for capital growth rather than longer-term income.
The benefits of interest-only Wiltshire mortgages can also apply to the self-employed, contractors, freelancers, and others who may have irregular monthly income. In this case, the lower monthly interest-only repayments can help when budgeting. Our interest only mortgage advice will cover all the options.
Interest Only Mortgage Lenders
Interest only has been a repayment method for mortgages for many years with a surge in the market at a time when endowments were a very popular repayment vehicle. However, following a decline in their popularity and also the perceived additional risk for the mortgage provider of the loan being repaid, many lenders have now restricted their availability or withdrawn from this market altogether. Interest only mortgage lenders however are still available subject to certain minimum standards and criteria.
Interest Only Mortgage Broker
We here at Ideal Home Loans are experts at making interest only mortgages work for you and your circumstances. Get in touch today to find out how we can help. We offer interest only mortgage advice in Westbury, Wiltshire and nationwide also.
INTEREST ONLY FAQs
Can I sell my mortgaged property to repay the interest-only mortgage?
If you have an existing interest-only mortgage this may have been arranged on the basis that you have a recognised savings plan such as an ISA or Endowment policy to repay the borrowing. For some however, the repayment strategy is to be the sale of the mortgaged property at the end of the term. Depending on how the value of your property has changed over the years, you may be able to repay the mortgage and also use any equity to then purchase a property at a lesser value.
If you are thinking about taking out a new interest-only residential mortgage, then many lenders in the current market would not consider the future sale of the property as a suitable repayment plan. These lenders would still need to be satisfied that you have an alternative means of repaying the loan other than the property itself. However, some lenders are agreeable to the mortgaged property being used as the repayment vehicle subject to the loan to value and other elements of your circumstances meeting their criteria.
What happens at the end of the term of the mortgage on an interest only-mortgage?
As your monthly payment on an interest-only mortgage just covers the interest accruing and does not reduce the mortgage balance, at the end of the term you will still owe the same amount that you initially borrowed subject to you not having made any other capital reductions during this time. The total mortgage balance needs to be repaid in full at the end of the agreed mortgage term, typically from the proceeds of a repayment vehicle such as an ISA, endowment policy or other investment plan. If you do not have a separate suitable repayment vehicle in place, then the loan may have to be repaid from the sale of your home.
Do I need a repayment vehicle in place to have an interest-only mortgage?
Yes. Current mortgage rules mean that lenders need to know both that you can afford to meet your monthly mortgage payments, and that you have a repayment vehicle in place that should be sufficient to repay the total mortgage balance at the end of the agreed mortgage term. The lender will seek to verify this when you apply for a new interest-only mortgage, and may also follow up during the mortgage term to ensure that your repayment vehicle is still on track to repay the debt.
In the past, lenders did not always have to verify that a repayment vehicle was in place when lending on an interest-only basis. If you have an existing interest-only mortgage and no designated repayment vehicle, or your repayment vehicle isn’t on track to cover the total mortgage balance at the end of the term, then you should contact your lender or a mortgage broker as soon as possible to discuss your options.
Can all mortgages be placed onto interest-only?
Some, but not all, lenders allow customers to switch their mortgage from a repayment to an interest-only basis. Those that do allow a switch from repayment to interest-only will need to verify that you have an acceptable repayment strategy in place to repay the mortgage at the end of the agreed term. We can help guide you from start to completion with free advice on interest only mortgages.
Can I change from interest-only to a repayment mortgage later on?
Yes, most lenders allow customers to switch their mortgage from an interest-only to a repayment basis within the term of the mortgage. It may also be possible to switch to a so-called “part-and-part” basis, where part of the mortgage remains on interest-only, and part operates on a repayment basis. This can be useful in cases where the borrower has a repayment vehicle in place, but it is likely to pay out less than the projected amount at maturity. Get free interest only mortgage advice in Westbury, Wiltshire and nationwide also today.