What’s an interest-only mortgage?
When you take out an interest-only mortgage, you only pay the interest each month on the amount you’ve borrowed. This makes the monthly payments lower than with a repayment mortgage, where you pay back the loan and the interest each month.
At the end of the interest-only mortgage term, you need to repay the full loan amount. If you don’t have enough money, you might need to sell the property to pay off your loan. As with any mortgage, the loan is secured against your home. And if you can’t maintain your monthly payments, your home may be repossessed.
Why choose an interest-only mortgage?
An interest-only mortgage makes your monthly costs more affordable in the short term. It might suit you if you’re low on funds now and expect to be better off in the future. For example, you might inherit money from a loved one.
Before a mortgage provider approves your interest-only mortgage, they may ask for proof that you can pay off the loan at the end of the term. This is known as a ‘repayment vehicle’, and includes things like an investment, an ISA, or a life insurance policy.
Another option at the end of your interest-only mortgage term is to switch to a repayment mortgage. This will probably increase your monthly payments but allow you to pay off your mortgage in full.
Why do interest-only mortgages suit landlords?
Some buy-to-let landlords opt for interest-only mortgages. This is because they can earn a regular income from rent, then sell the property at the end of mortgage term to pay off the capital. It’s an arrangement that they might have with multiple properties at the same time.
What are the pros and cons of an interest-only mortgage?
Interest-only mortgages don’t suit everyone, so it’s important to weigh up the pros and cons first.
Some of the benefits of interest-only mortgages include:
- With rates rising and affordability rules tightening, an interest-only mortgage might be more affordable than a repayment mortgage in the short term.
- You get the flexibility to pay less now and more in the future when you have the finances required.
- If you come into money sooner than you expected, you could pay back the loan faster than with a repayment mortgage.
- You could sell the property to repay the loan at the end of the term. If house prices are on the rise, you might make a profit on the sale even after repaying the loan.
Some of the disadvantages of interest-only mortgages include:
- As you’re only paying the interest each month, your mortgage balance won’t fall. You’ll need to pay the full loan amount at the end of the term.
- As your loan amount doesn’t fall, you’ll pay more interest in total than you would with a standard repayment mortgage.
- If you’re relying on an investment to cover the repayment at the end of the term, remember its value can go down as well as up. You could get back less than you invested, and you might not have enough to cover the cost of the loan.
- Some lenders don’t offer interest-only mortgages, so you’ll have a smaller choice of providers than with a standard repayment mortgage.
What’s the difference between an interest-only mortgage and a repayment mortgage?
When you take out a repayment mortgage, you pay back some of the loan and some interest each month. As long as you keep up with payments, you will pay off the entire loan by the end of the term.
The difference with an interest-only mortgage is that you only pay the interest on the loan each month. By the end of the term, the amount you borrowed won’t have decreased and you’ll still need to pay it back.
How Saga can help you with interest-only mortgages
We partner with Tembo Money to give you access to award-winning mortgage advice. Tembo’s expert advisors can chat through your options and help find an interest-only mortgage that works for you.
Get in touch today and discover how you could reduce your monthly payments with an interest-only mortgage.
Award-winning advice from Tembo
All mortgage advice through Saga Mortgages is provided by Tembo Money Limited, who are regulated by the Financial Conduct Authority (FCA) under the registration number 952652.
Their team of award-winning mortgage advisors can help you with a range of mortgage solutions including:
- House buying
- Retirement interest-only mortgages
- Buy-to-lets
- Remortgaging
- Family-supported mortgages
- Later life lending
