Compare Interest Only Mortgages
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Interest only mortgages could help keep your initial mortgage costs down. Simply select the type of interest only mortgage you need, and a few quick questions later you’re ready to compare the interest only mortgages and rates on offer for your particular circumstances.
Think carefully about securing debt against your home. Your home may be repossessed if you do not keep up repayments on your mortgage
What is an interest only mortgage?
With an interest only mortgage you only pay back the interest on your mortgage each month and not any of the loan. Because of this, providing you keep up with your repayments, when you reach the end of the mortgage term you will still owe the same amount of money as you borrowed. This means you’ll need to have a way to pay it back. So with a £200,000 interest only mortgage at a rate of 2.5%, you’ll make monthly repayments of £417 to cover the interest, but still have the £200,000 to repay at the end of the term.
» MORE: How interest only mortgages work
Interest only mortgage vs repayment mortgage
An interest only mortgage is very different to a repayment mortgage, where normally your monthly repayments would pay back both the interest and some of the capital at the same time. With a repayment mortgage you can therefore expect your loan to be completely paid off when your term ends, so long as you keep up with your repayments; however, your payments each month will also be higher than on an equivalent interest only mortgage.
But while an interest only mortgage can prove more affordable on a monthly basis, you’ll end up paying more in total over a full mortgage term. This is because with an interest only mortgage you always pay interest on the full loan amount; with a repayment mortgage, the amount of interest you’re charged will gradually decrease as you pay off more of the original loan.
Take the example of a £200,000 mortgage over a 25 year term at an interest rate of 2.5%:
|Monthly repayment||Total interest paid over full term||Total repaid over full term|
|Interest only mortgage||£417||£125,055||
(interest plus loan to be paid off at term end)
(interest plus loan already fully paid off)
How interest only mortgages have changed over time
Before 2008, around one in three home loans were interest only mortgages, but now they are a lot harder to find.
Things changed during the financial crisis, when it became apparent that many interest only mortgage borrowers would find it difficult to pay back what they owed at the end of their term. One problem was that there had been no obligation on lenders to make sure that they could. Another was that some common strategies were coming unstuck - house prices fell and stock markets slumped, leaving many who were depending on selling their home or investments to cover their loan repayment with a shortfall.
A crackdown on interest only lending followed, and lenders withdrew from the market as a result. This was compounded when the UK regulator - the Financial Conduct Authority - introduced tougher rules in 2014 requiring that lenders get proof from prospective interest only borrowers that they have an appropriate repayment strategy in place.
Can you still get interest only mortgages?
A number of lenders have gradually returned to offer interest only mortgages in the years since the stricter rules were introduced, but the options available to residential borrowers are nowhere near as wide as they once were. Interest only mortgage loans are only available for much lower amounts against the value of the property, often capped at around 60-75%. The exception is buy to let interest only mortgages, which make up the majority of the mortgage options available to landlords.
» COMPARE: Buy to let mortgages
How does an interest only mortgage work?
As with repayment mortgages, interest only mortgage rates can be either fixed or variable. With a fixed rate you’ll have the security of always knowing what your monthly repayments will be for the duration of the product term you choose, while with a variable rate, you could pay less if interest rates fall, but more if they rise.
What happens at the end of an interest only mortgage?
Reach the end of your interest only mortgage term, and you must repay the original mortgage loan amount. Rules set by the Financial Conduct Authority mean lenders must check that you have a suitable repayment plan set up before they can approve an interest only mortgage. Lenders must also make a minimum of one check during a mortgage term to see whether your plan remains on course to pay off your loan.
Despite the requirements placed on lenders surrounding interest only mortgages, the overall responsibility for ensuring you can pay rests with you.
How to pay off an interest only mortgage
The type of repayment plan a lender would need to see before they will approve an interest only mortgage might include:
- savings in a savings account or cash ISA
- a stocks and shares ISA
- investments in bonds, shares and unit trusts
- a regular savings plan, such as an endowment policy
- a pension from which you could potentially take a 25% tax-free lump sum (at age 55)
- separate property or assets you could sell.
Not all lenders will deem all types of repayment option as acceptable - for instance, some don’t consider savings to be a suitable strategy - and it is down to lender discretion as to whether they feel you have an adequate plan in place. The mis-selling of endowments in the past, and their unreliability in delivering the returns promised, means many lenders also want to see recent projections of growth if you plan to use one going forward.
Some potential options for repaying that usually won’t prove acceptable include:
- the expectation of an inheritance, bonus from work or other windfall.
- relying on a rise in the value of your home that would allow you to downsize and settle your mortgage with the remaining funds.
What to do if you can’t repay an interest only mortgage
If you’re approaching the end of your interest only mortgage deal and your repayment plan won’t cover all of what you need to pay back, your options may include:
- asking your lender to extend the term of your mortgage to give you more time to raise the funds required.
- remortgaging to another interest only mortgage will provide you with further time and potentially a lower rate to help save the money you need.
- moving to a repayment mortgage. Your monthly payments are almost certain to rise, but you’d also start making inroads to paying off your loan. You could ask for a longer term or use a part and part mortgage to make your payments more affordable too.
- selling your home. This is usually an option of last resort, but if the value of your home has increased, you may still have funds left over once your mortgage is settled to help find a new place to live. However, if house prices have dropped, and your property is now worth less than your mortgage, you’re in negative equity and selling won’t raise enough to repay what you owe.
Not being able to repay an interest only mortgage has been a major problem for many borrowers in the past, and will continue to challenge more going forward. If this is a concern for you, talk to your lender or a mortgage adviser about your situation and they’ll help explain the options that are available to you.
Can I get an interest only mortgage?
You can usually expect the lending criteria on an interest only mortgage to be set at a relatively high bar. As already mentioned, you’ll need a suitable repayment strategy to cover the outstanding loan, and in this regard, the added reassurance of a significant annual income is something interest only mortgage lenders often seek.
Given such requirements, it is unlikely that many first-time buyers will be in a position to secure an interest only mortgage deal, and will need to look towards a repayment mortgage aimed at those buying for the first time instead.
» COMPARE: First-time buyer mortgages
Types of interest only mortgages
Interest only mortgages can be found in several different forms, each with a specific purpose.
Retirement interest only mortgages
Aimed at those over the age of 55, retirement interest only mortgages - or RIOs - differ from normal interest only mortgages in that your loan amount only usually needs to be paid back when you die or move into long-term care, and your house can be sold.
» MORE: Learn about RIOs
Interest only remortgages
An interest only remortgage is an option if you want to switch to a better interest only deal than you currently have. Typically you’ll want to remortgage just before your initial rate period comes to an end and you’re switched to your lender’s standard variable rate. It might also be possible to remortgage to an interest only deal from a repayment mortgage if you wish to lower your monthly payments and have enough equity built up in your property. However, the need for a viable loan repayment strategy still remains along with the right amount of equity in the property.
» COMPARE: Interest only remortgages
Part and part mortgages
A part and part mortgage sees your overall loan divided into an interest only part and a repayment mortgage part. So some of your mortgage payment each month will simply cover interest, and some will make headway into paying off your original mortgage loan. Repayments with a part and part mortgage should be more affordable than with a repayment mortgage, but while your loan amount will decrease, you’ll still have some to pay off at the term's end.
Joint interest only mortgages
If you want to buy with someone else, joint interest only mortgages are available. With two names on the mortgage application, lenders assessing your eligibility may require a higher joint income than if just one of you applied. But have broadly similar incomes of a decent level, and you may find some of the best interest only mortgages are in reach.
Advantages and disadvantages to interest only mortgages
Interest only mortgages can prove useful to some borrowers, but won’t be suitable to others. Here are the pros and cons of interest only mortgages:
Advantages of interest only mortgages
- lower monthly payments than a repayment mortgage, as you’re only paying off the interest on the mortgage each month.
- you could use the money you save on repayments to improve your property and potentially increase its worth.
- lower payments mean you may be able to borrow more
Disadvantages of interest only mortgages
- you will need a big deposit of normally 25% or more and high earnings to get one.
- you’re not paying off any of the mortgage loan with your repayments, so will still owe the full mortgage amount at the end of your term.
- you’ll already have or must set up a repayment vehicle to pay off the mortgage loan when the term ends, and this will need to perform as expected if you’re to avoid a shortfall. A drop in property prices could impact the fallback of selling your home to cover your loan too.
- even with the best interest only mortgage rates, what you pay over the full term will still be more than with a repayment mortgage because the debt never decreases.
- there are relatively few interest only mortgages from which to choose.
How to choose the best interest only mortgage for you
Our mortgage comparison tool is the simplest way to find interest only mortgage deals available today.
Highlight the reason you need a mortgage, and type in your property value, mortgage amount and the length of term you’re considering, and the interest only mortgages relevant to you will appear. For each mortgage you’ll see its initial interest rate, APRC, and any fee for taking out the product. There’s also an estimate of the repayment that you’ll need to make each month.
How to apply for an interest only mortgage
If you decide to apply for an interest only mortgage, you can expect the usual questions you’d face when applying for a mortgage of any kind, and a few more besides.
When checking if an interest only mortgage is affordable to you, a lender will want to assess your income, outgoings, savings and existing debts, so you should have the necessary information to hand. Documents including payslips, your latest P60, your final accounts (if you’re self employed), and bank, loan and credit card statements are usually needed, so gather them in preparation. Your credit score proves important with any mortgage application as well.
In addition, you’ll need to show how you intend to pay off your loan amount at the end of the term. This means you’ll need the paperwork associated with any investments, pensions, property, and endowments that you want considered as a repayment vehicle.
Do I need advice?
If you’re comfortable with what an interest only mortgage entails, there’s nothing to stop you directly approaching a lender yourself. That said, the potential complexity of interest only mortgages, particularly in relation to repayment plans, means using a mortgage adviser can be really worthwhile. Sometimes there are interest only mortgage rates that are only available through a broker too.
How much deposit do you need?
You’re likely to need a much bigger deposit with an interest only mortgage than you would with a repayment mortgage, but different lenders will have different requirements.
Many interest only mortgage lenders work to a maximum loan to value (LTV) of 75% - that means you’ll need a deposit or equity covering at least 25% of the property value, but many work around 60% or only offer interest only deals in conjunction with part repayment mortgages for your total borrowing requirement.
Alternatives to interest only mortgages
Your only real alternative to an interest only mortgage is a repayment mortgage. However, for interest only mortgages remember there will be a mixture of deals available with both variable and fixed rate options.
Fixed rate interest only mortgages offer more certainty by guaranteeing your payments will remain the same for a specified period, but will usually have higher rates than their variable counterparts at the beginning.
Interest Only Mortgages FAQs
Can you get an interest only mortgage as a first time buyer?
There is nothing to officially rule out a first-time buyer from getting an interest only mortgage, but given the typically high deposit and income requirements, and the need for a repayment plan, these are things that first-time buyers often struggle to provide.
Can I get a buy to let interest only mortgage?
Yes, you can. In fact, most buy-to-let mortgages are interest only.
» COMPARE: Buy-to-let mortgages
Can I extend my interest only mortgage term?
If you already have an interest only mortgage but are worried you won’t be able to pay it off when you should, one option is to ask your lender if they will extend your term. You might be allowed but it’s by no means guaranteed, so speak to them as soon as your concerns arise.
Can I change my interest only mortgage to repayment?
Provided you can prove the higher payments will be affordable, it should be possible to switch from an interest only mortgage to a repayment mortgage. If you’re happy with your current lender, you might be able to do a product transfer. Alternatively, you could remortgage, and switch to a new lender if they are offering a better deal.
» COMPARE: Remortgage deals
How to pay off an interest only mortgage early
If your repayment plan delivers ahead of time, or you receive a windfall and want to pay off your mortgage early, this is usually possible. To avoid early repayment charges, you’ll generally need to wait until any initial period on your mortgage ends, but you should always check the conditions attached to your mortgage first.
Can I change my repayment mortgage to interest only?
As long as you can meet the criteria set out by interest only lenders you might be able to switch from a repayment mortgage to an interest only mortgage, but you will need a repayment strategy for the loan amount and will probably pay more in interest across the full duration of your mortgage.
When are interest only mortgages a good idea?
Interest only mortgages can be a good idea if you’d prefer lower monthly payments now, and are confident you’ll have the funds to pay off your mortgage loan in the future. An interest only mortgage might also mean you can afford a more expensive home.
Can I get an interest only mortgage with bad credit?
It may be possible to get an interest only mortgage if you have bad credit, but you might need to use a mortgage broker to find a willing lender. If you can’t get an interest only mortgage due to poor credit, a part and part mortgage can sometimes prove a little easier to secure and may be your next-best option.
What to do if you are refused an interest only mortgage
If your application for an interest only mortgage is turned down, you should try to find out from the mortgage lender why. It may be that your repayment plan isn’t up to scratch, in which case you could explore alternative options that might better reassure the lender you’ll be able to pay back the loan that you owe. And if you’ve been rejected because of your credit history, you could try and improve your credit score.
If your options are narrowing, it may be worth approaching a mortgage adviser to lean on their expertise and see if they know specialist lenders that might be able to help.
What is a repayment vehicle?
A repayment vehicle is the means by which you intend to repay your mortgage loan at the end of the term. It might be a form of investment, savings, pension, endowment, a property or another asset which will run alongside your mortgage, with the aim of delivering the returns needed to pay off your loan.
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more
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