What is an interest-only mortgage?
What is an interest-only mortgage? Can I get one? And what happens if I can’t pay it off? Here’s all the info you need.
Last updated on
May 23, 2022 12:05
An interest only mortgage is a type of mortgage where you only pay back the interest on the amount you’ve borrowed. You don’t start paying back the amount you’ve borrowed until the end of the term.
For some, that’s pretty handy, because it means monthly payments are much lower. But the downside is, at the end of the term, you still owe the full amount you borrowed. And before they give you an interest only deal, lenders will want to see that you’ll be able to pay that back.
So, what is an interest only mortgage? And who can have one? Here, we’ll run you through everything you need to know.
There are two main ways that you can repay your mortgage deal.
And part and part mortgages? Yep, you can do a bit of both. Some lenders offer mortgages where part is interest only and part is repayment. These will differ from lender to lender, but it means you’d be left with a proportion left to repay at the end — but not the whole sum.
Interest only mortgages make for much cheaper monthly payments than repayment mortgages.
On a mortgage of £250,000, at 3% interest, payable over 25 years, you’ll pay £625 monthly on an interest only mortgage. With a repayment mortgage, you’d be paying £1,185 a month.
However, the total you’ll have paid over 25 years will be different. At the end of your interest only mortgage term, you still owe £250,000, while you’ll have paid £187,500 in interest.
Meanwhile, on a repayment mortgage with a stable interest rate, you’ll pay £105,800 in interest, and – if you keep up your monthly repayments – you’ll have paid off your mortgage loan entirely.
Note: If you’re looking for an interest only mortgage calculator, try our mortgage comparison tool to browse the interest only mortgages (plus costs and rates) on the market right now.
It’s worth noting that there’s another drawback to interest only mortgages, too:
Before a lender gives you an interest-only mortgage, they’ll expect you to meet much stricter criteria than for a repayment mortgage. You’ll also have to show evidence that you’ll be able to pay back the whole loan at the end of your mortgage term.
Once upon a time, the rules were less strict and you could take out interest only mortgage deals without showing how you were going to pay them back. When banks realised there were too many cases where they wouldn’t see the funds again, the rules changed quickly.
So these days, it’s pretty hard to get an interest only mortgage. For residential borrowers, interest only mortgage providers are few and far between. According to Moneyfacts, only 3% of mortgage deals are interest only. And if you want one, you’ll need to meet strict criteria:
All this means that the vast majority of first time buyers won’t be eligible for an interest only mortgage.
There are two main interest only mortgages that don’t have these criteria:
First up, unless you’re on a RIO mortgage, interest only deals can be a little risky. As you’ll only be paying off the interest, there’ll be a big lump sum to pay off at the end of the term – on top of the interest you’ve already paid.
That means you should be saving or investing enough to be able to pay it back. The risk is, of course, that your circumstances can change – and you can never guarantee you’ll be able to repay when the time comes.
Good question. Technically speaking, your interest only mortgage contract will entitle lenders to repossess your property if you can’t pay off your mortgage.
However, it’s not all so scary. You do have some options if it looks like you’ll struggle to pay it off.
If you need a hand with anything related to your mortgage, Habito is here to help. As a broker, we’ll help you find the right mortgage and guide you through the whole process.
Thinking about getting a mortgage? Read our top tips to get yourself mortgage-ready, find the right mortgage deal, and make the application.
The Bank of England has increased the interest rate to 0.75% to tackle inflation, here’s what it might mean for you.
Here's all you need to know about converting a residential mortgage into a buy-to-let mortgage.
Habito specialises in helping you get the best mortgage or remortgage, all online, for free