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With an interest-only mortgage, you only have to pay back the interest on the amount of money you’ve borrowed.
Your monthly payments will be lower than a repayment mortgage, but you’ll usually need a higher deposit.
At the end of your mortgage term, you’ll still owe the full amount of your loan which you’ll need to repay.
With a repayment mortgage, each month your payments will be used to pay back some of the interest on your loan and some of the loan amount itself, known as the capital.
Paying back both the interest and the capital will make your payments higher than if you had an interest-only mortgage.
But by the end of your mortgage term, you’ll have paid off the whole amount that you owe.
With an interest-only mortgage, you’ll only be paying the interest on the loan. This means your monthly payments will be much lower than if you had a repayment mortgage.
At the end of your mortgage term you’ll still owe the full loan amount, so to take out this type of mortgage you’ll need to have a repayment plan in place to repay the capital.
You’ll need to give your lender proof that you have an acceptable plan to repay the loan, for example:
The main advantage of interest-only mortgages is that your monthly payments will be less, but there are other pros and cons to consider:
Our mortgage calculator can help you to work out what your interest-only mortgage could cost you each month and how much you might be able to borrow.
When your mortgage comes to an end, your lender will ask you to repay the loan amount in full. This is why you’ll need to have a solid repayment plan in place.
There are several options you can use to repay your interest-only mortgage which include:
If you’ve built up enough money through your investments and savings, you can use this to pay off your mortgage. But relying on investments is a risk as there’s always a chance they may not perform as well as you’re expecting them to.
Your lender might let you switch to a repayment mortgage, but be aware that this will increase your monthly payments. You could try to reduce your payments by having a longer mortgage term or choosing a part repayment/part interest-only mortgage.
Some lenders will accept a personal pension plan as a repayment methodvehicle. If you choose to receive a lump-sum payment on retirement, you can use this to pay back your outstanding mortgage but, as with other investments, you may receive less than you expected.
It’s a good idea to compare providers and options before your mortgage ends. You could find another lender, or ask your existing lender for a new deal with a better rate. But you’ll still need to meet the criteria and your age may mean you have fewer mortgage options.
If your property’s value is the same as when you bought it, you could sell it and use the money to pay back your loan. If your home has increased in value you could use the equity to buy a new property.
Designed to help older borrowers, this type of mortgage works in a very similar way to a regular interest-only mortgage, but without having a fixed end date.
Instead, the lender receives full payment of the loan when the property is sold, when the homeowner moves into long-term care or when they pass away.
To take out one of these mortgages you’ll have to prove that you can afford the monthly interest payments - for example, through the income your receive from your pension.
Some retirement interest-only mortgages will also let you pay back some of the capital, reducing the amount that you owe and helping you to leave more to your loved ones.
While interest-only mortgages are less common than they used to be, they’re still being offered by a number of mortgage providers.
You’ll find there are several building societies and banks that will provide interest-only mortgages to eligible borrowers.
Because you’ll only be paying the interest, lenders need to be sure you’ll be able to pay back the full loan amount at the end of the mortgage term - so you’ll have to provide details of how you plan to do this.
This is why it’s often easier to get an interest-only mortgage for a buy-to-let property, as most landlords plan to use the property as an investment and use the rental return to cover costs.
To qualify for an interest-only mortgage you’ll need to meet some strict criteria, but you should be eligible if you:
If you can’t afford your repayments, you should let your lender know straight away. Most lenders will want to help you find a solution.
Your lender might be able to extend the term of your mortgage or reduce the interest rate you’re on, which could help to lower your monthly payments. You might be able to take a mortgage holiday or make partial payments which could help with your cash flow.
If there are no more options left open to you, then repossession of your home is a possibility. Mortgage lenders have the right to sell the property and use the proceeds to pay the balance of your loan, but this tends to be a last resort.
Whether you can switch will depend on you meeting your lenders’ criteria for a repayment mortgage, but typically it’s fairly straightforward to switch products.
You can switch mortgages by either transferring from an interest-only to a repayment mortgage with your existing lender, or remortgaging with a new lender.
With a repayment mortgage, your monthly payments are likely to increase, so you’ll need to work out what you can afford. Extending your mortgage term can help to decrease the payments.
Most lenders will only allow you to borrow up to 75% of the value of the property, this means you’ll need to have a large deposit.
Mortgage providers vary in the amount of deposit they require and the loan-to-value ratio they’ll lend, so it’s a good idea to compare mortgage offers from different providers to help you find the best deal.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
PLEASE NOTE: THE FCA DOES NOT REGULATE MOST BUY TO LET MORTGAGES