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Interest Only Mortgages

A Quick guide to interest only mortages

If you are looking to take out a mortgage or remortgage and money is tight – or if you are simply looking to reduce your monthly payments – an interest-only mortgage could be a good short-term solution.

As the name suggests, your monthly mortgage payments only repay the interest; you will not pay anything towards the property itself. This may sound risky, and it wouldn’t be advisable in the long term without ensuring an appropriate plan is in place to pay off the loan amount, but in the short term, it can make sound financial sense for many homeowners who are looking to minimise their outgoings.

Why interest-only mortgages are a good idea

Because you will be paying nothing towards the value of the property until the interest-only period has finished, your mortgage payments will be much cheaper. For example:

 

  • Mortgage value = £120,000

  • Repayment period = 25 years

  • Interest rate = 5%

  • Repayment mortgage monthly payments = £701.51

  • Interest-only mortgage monthly payments = £500

That’s a difference of just over £200 per month – which could make a big difference to the homeowner’s finances.

Why interest-only mortgages are a bad idea

The main disadvantage of an interest-only mortgage is that you do not pay anything towards the value of the property – and you will have to pay this at the end of your interest-only terms.

Assuming you take an interest-only mortgage for the full 25-year term, this means that you will have to pay the full loan amount at the end of that 25 years. Most people who take this route will save towards the value of the property separately – but this takes very good discipline.

It also means that, unless the property increases in value, the mortgage holder will own absolutely no equity in their home until their mortgage is paid off in its entirety.

Should I choose an interest-only mortgage?

If you are disciplined with your finances, then there is no reason why not. So long as you are confident that you will be able to pay for the remaining value of your home once the mortgage finishes, it can be a sensible option.

However, many people prefer the security and convenience of paying off both the value of the property and the interest – and if you cannot be certain that you will be able to make the final payment at the end of your interest-only period, a repayment mortgage is probably the more sensible option.

 

Our Top 10 Overseas Mortgages

About overseas mortgages

Overseas mortgages are a specialised field and it is an area that requires sound independent advice. Buying a property abroad will often require financing and the method used to buy an overseas property is often down to individual circumstances. It can also be influenced by the mortgage products available at home and overseas.

 

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