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Interest only mortgages FAQs
What is an interest only mortgage?
With an interest only mortgage you will only pay back the interest on the mortgage each month and not any of the loan. At the end of the mortgage term you will still owe the same amount of money as you borrowed.
How is interest normally paid on a mortgage?
Normally you would pay back both the interest and the capital in monthly repayments. This is called a repayment mortgage.
What are the benefits of interest only mortgages?
An interest only mortgage will have cheaper monthly repayments as you are only paying off the interest on the mortgage each month.
What are the downsides?
You are not repaying any of the mortgage loan with your monthly repayments, therefore you will still owe the full mortgage amount at the end of your term. Thus you will need either a 'repayment vehicle' or an alternative plan to pay off the mortgage loan when the term ends.
What is a repayment vehicle?
A repayment vehicle is the term given to a plan for repaying a loan such as an investment which runs alongside the mortgage, the returns of which are intended to pay off the mortgage loan. Examples of repayment vehicles include Stocks and Shares ISAs, endowment policies and investment bonds.
Do I need a larger deposit to get an interest only mortgage?
Yes, most lenders only offer interest only mortgages up to a loan to value of 60%, though it is possible to get higher if you have an accepted repayment vehicle in place. The loan to value (LTV), denotes the amount you can borrow compared to the value of your home. Some lenders will allow you to take a proportion of the loan as interest only and a proportion as repayment to allow you to get a higher LTV.
What criteria do I have to meet to get an interest only mortgage?
Your lender will want to know what your repayment strategy is and this will determine not only whether you can access an interest only mortgage but what loan to value (LTV) will be offered. You'll also have to meet a minimum income requirement along with standard affordability criteria.
How can I compare interest only mortgages?
You can use Know Your Money's comprehensive comparison tables to compare interest only mortgages.