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An interest only mortgage is a type of mortgage where you only pay the interest on the loan each month, without paying off any of the principle amount borrowed. This means your monthly payments are lower than they would be with a traditional repayment mortgage but you won't be paying off any of the debt. In this blog post, we'll take a closer look at interest only mortgages in the UK and what you need to know if you're considering this type of mortgage.
Firstly, lets look at why someone might consider an interest only mortgage. For some borrowers, an interest only mortgage can be an attractive option because it allows them to keep their monthly payments low. This can be particularly useful for people who are self-employed or have irregular income, as it can help them manage cash flow. Additionally, some borrowers may be looking to invest the money they save on mortgage payments elsewhere, such as stocks or additional properties.
However, it's important to understand that an interest only mortgage is not without risk. Because you're not paying off any of the principal amount borrowed, you'll need to have a plan in place to repay the full amount at the end of the mortgage term. This could involve selling the property, using savings or investments to pay off the debt. If you don't have a solid plan in place, you could end up in financial difficulty when the mortgage term ends.
So what do you need know if you're considering and interest only mortgage?
Here are a few things to keep in mind:
Eligibility: Not all lender offer interest only mortgages and those that do may have stricter eligibility criteria than for traditional repayment mortgages. You may need to have a larger deposit or higher income to qualify for an interest only mortgage.
Affordability: Although your monthly payments will be lower with an interest only mortgage, you'll still need to be able to afford the payments. Lenders will assess your income and expenditure to ensure that you can afford the mortgage payments both now and in the future.
Repayment plan: As mentioned earlier, you'll need to have a solid plan in place to repay the full amount borrowed at the end of the mortgage term. This could be involve selling the property, using savings or investments. It's important to have a realistic and achievable plan in place before taking out an interest only mortgage.
Risks: Interest only mortgages come with higher risks than a capital repayment mortgage and it's important you fully understand these. Seek advice from a mortgage broker to fully understand all the risks involved.
In conclusion, interest only mortgages can be a good option for some borrowers but they come with risks and require careful planning. If you're considering an interest only mortgage, it's important to seek advice from a mortgage broker and ensure you have a plan in place for repaying the principal at the end of the mortgage term.
YOUR HOME MAY BE REPOSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Approved by The Openwork Partnership on 28/03/2023