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Interest-only mortgages
A Guide to Interest-Only Mortgages

A mortgage whereby your regular repayments only go to service the interest on the money you have borrowed is called an interest only mortgage. If you have an interest-only mortgage, you will generally make investments in order to pay off the capital sum at the end of the mortgage term.

Any borrower is permitted to take out interest-only mortgages. This type of mortgage is ideal for borrowers who are confident that they will be able to pay off a large amount of capital at the end of the mortgage term. These people may prefer to put their money in more lucrative investments or they may simply have a substantial amount of cash. Be aware that there is always the risk that your investments will not build up enough funds to meet your needs.

What types of interest-only mortgages are available?

If you decide go for an interest only mortgage, you can opt for all the standard deals such as mortgages with fixed, variable, capped, discounted, and tracker rates.

Your deal will generally usually last for a specific period of between 1 to 5 years. There are some deals which last longer, even as long as the life of your mortgage. At the end of your mortgage term, you will normally move to your loan provider’s standard variable rate. Alternatively, if you so wish, you could negotiate an entirely new package, given your loan provider is willing.

As with most interest-only mortgages, you will be expected to make arrangements to pay off the capital you owe at the end of your mortgage term. You are not obliged to arrange your investment vehicle through your lender.

How do interest only mortgages work?

As with most other standard mortgage types, you can normally borrow from 3 to 4 times a single income or 2.5 to 3 times combined income. If necessary, you will be able to find certain loan providers who are willing to lend you much more.

It is also possible to take up a 100% interest-only mortgage. No deposit is necessary for a 100% mortgage. In all other cases, most lenders will require a deposit of at least 5%.

What are the benefits of interest only mortgages?

The most obvious and immediate advantage of interest only mortgages lies in the fact that your regular or monthly repayments will be comparatively low. This may leave you with more cash to spend on other things. If you use the money to invest wisely and if luck is on your side, you could see some very good returns on your investments. If this is the case, you may even have money remaining after you have paid off your capital sum.

If needed, you are free to use your money to start a business or a family, instead of being tied to paying significant amounts on a monthly basis towards a standard mortgage. Essentially, you are able to postpone a large part of the mortgage payments until a time where, hopefully, you are financially more comfortable to make repayments.

Important considerations when taking out interest-only mortgages

Most interest only mortgages carry higher interest rates than other standard repayment mortgages. You need to be prepared that, should interest rates rise, you may find yourself owing and paying a great deal more than initially planned.

Interest only mortgages can be a cause for concern if your investment does not perform as well as expected. If this happens, you may not have enough to pay off the capital sum. Some borrowers who have found themselves in this difficult situation have been forced to sell their homes in order to settle their debts.  

Remember:

  • Consult a trusted and qualified financial adviser before choosing an interest-only mortgage.

  • Meticulously track your investment progress on a regular basis.

  • If under-performing, plan to make extra payments into a fund or look to build up a lump sum of cash to pay off your interest only mortgage in another way.

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