Interest-only mortgage

Advantages and disadvantages

The main advantage of interest-only mortgages is that your monthly payments will be less, but there are other pros and cons to consider:

Pros

• Cheaper payments can help you to save money and invest
• The savings you make can be spent on home renovations which can help to increase your property’s value
• You could buy a more expensive home than you’d otherwise be able to afford
• You have the flexibility to make overpayments and to switch to a repayment mortgage when you’re able to afford higher monthly outgoings

Cons

• You’ll usually pay more in total than you would with a repayment mortgage
• Lenders often require you to have a larger deposit, usually 25% or more, and be a higher-earner
• You’ll be left with all of the capital to pay off at the end of the mortgage term
• It can be complicated looking after both the mortgage and repayment method
• You could end up with a shortfall if you don’t have enough to pay the balance at the end of your mortgage, this could put you at risk of losing your assets

What happens at the end of an interest-only mortgage?

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:

Using savings and investments

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.

Switching to a repayment mortgage

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.

Using a tax-free lump sum from your pension

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.

Remortgaging

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.

Selling your property

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.

Retirement interest-only mortgages

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.