Mortgages can either be set up on an interest only or a repayment basis. With a repayment mortgage borrowers pay both capital and interest each month so that at the end of the mortgage term the mortgage is fully repaid.
With an interest only mortgage, borrowers pay only the interest on the mortgage loan which means that at the end of the mortgage term the entire mortgage amount remains outstanding. An interest only mortgage is a specialist option of repaying your mortgage borrowing as when you reach the end of your borrowing term, you will still owe the mortgage lender the same amount that you originally borrowed. As this lump sum is still outstanding, you'll need to have made provisions to repay this entire amount at the end of your mortgage term.
Interest only loans can offer flexibility for borrowers who have a method to repay the mortgage before the end of the mortgage term.
Taking out an interest only mortgage is considered by mortgage lenders as a high risk way to repay your mortgage. You could end up with a shortfall at the end of your mortgage if, for example, the value of your property reduces during years of falling house prices. If this is the case you could find that your property is worth less than you owe to the lender leaving you with a shortfall. If you are paying into a savings plan, you could find that in times of lower investment returns the value of your investment plan is less than the amount required to repay your mortgage.
If you are looking for an interest only mortgage you will find that lenders may impose very strict lending criteria such as requiring a large deposit (often a minimum of 50% of the value of the property) and higher income levels. Lenders will need to see evidence of your repayment vehicle before they will consider making you an offer for an interest only mortgage.
If you have a repayment vehicle and would like to get more information about interest only mortgages then please speak to one of our advisers. Our team are fully qualified and will advise you on your best mortgage repayment options over the telephone at a time to suit you.
Many customers with interest only mortgages find themselves trapped on their lender's standard variable rate (SVR) and unable to remortgage or increase their mortgage as they cannot afford to switch their mortgage to repayment and other lenders are not prepared to lend on an interest only basis.
If you have an interest-only mortgage it is important to ensure that you are on track to repay the mortgage at the end of the term by reviewing the value of your repayment vehicle regularly. If you don’t have a repayment vehicle then perhaps consider switching your mortgage to a repayment basis.
If you have more than 50% equity in your property and a repayment vehicle that is on track and accepted by a wide range of lenders, then you should be okay. But if this isn't the case, then you may find it difficult to remortgage when your existing deal comes to an end.
Make sure you review your investment plan regularly and take action or get financial advice if you think it won’t provide sufficient funds to pay off your mortgage.