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Buying a property can be one of the biggest investments in a person's life. There are many options when it comes to financing a property, including interest only mortgages. But what exactly is an interest only mortgage, and is it the right choice for you? In this blog post, we will discuss everything you need to know about interest only mortgages.
What is an interest only mortgage?
An interest only mortgage is a type of mortgage in which the borrower only pays the interest on the loan amount each month. This means that at the end of the mortgage term, the borrower will still owe the full amount borrowed as they have not paid off any of the capital. Interest only mortgages typically have lower monthly payments than repayment mortgages, as the borrower is only paying the interest and not the capital.
However, you MUST ensure you have an exit strategy to repay the loan at the end of the mortgage term. You can sell the property to repay the loan or use savings, as an example.
What’s the difference between interest only and repayment mortgages?
The main difference between interest only and repayment mortgages is the way in which the loan is repaid. With a repayment mortgage, the borrower pays both the interest and the capital each month, which means that at the end of the mortgage term, the loan is fully paid off. With an interest only mortgage, the borrower only pays the interest each month, which means that at the end of the mortgage term, the borrower still owes the full amount borrowed.
Are buy-to-let interest only mortgages available?
Yes, buy-to-let interest only mortgages are available. They work in the same way as a standard interest only mortgage, but are specifically designed for landlords who are buying property to rent out.
Can I get an interest only mortgage?
Yes, you can get an interest only mortgage. However, they are becoming less common as lenders are becoming stricter with their lending criteria. Lenders will typically require a larger deposit and proof of a repayment strategy, which we will discuss in more detail later in this blog post.
How do I get an interest only mortgage using Hello Mortgage as my broker?
Hello Mortgage is a mortgage broker that can help you find the right interest only mortgage for your needs. They will be able to provide you with advice on the best lenders and deals available, and can help you through the application process.
How much do I have to earn to get an interest only mortgage?
The amount you need to earn to get an interest only mortgage will depend on a number of factors, including the size of the loan, the lender's lending criteria, and your own financial situation. Lenders will typically require you to have a higher income than you would need for a repayment mortgage, as the monthly payments will be lower and the lender will want to ensure that you can afford to repay the loan.
Can I make a joint application for an interest only mortgage?
Yes, you can make a joint application for an interest only mortgage. This means that two or more people can apply for the mortgage together, and the lender will take into account the combined income and financial situation of all applicants.
How big a deposit will I need for an interest only mortgage?
The deposit required for an interest only mortgage will depend on the lender's lending criteria, but will typically be larger than for a repayment mortgage. Lenders will usually require a minimum deposit of 25%, although some may require more. It's important to shop around and compare deals from different lenders to find the best deal for you.
What are the advantages of an interest only mortgage?
The main advantage of an interest only mortgage is the lower monthly payments. This can be particularly beneficial for borrowers who have a variable income, such as self-employed individuals or those on commission-based salaries. With a lower monthly payment, they can still afford to purchase a property without the risk of overextending themselves financially.
Interest only mortgages can also be a useful tool for investors who want to use their money for other investments, such as stocks, bonds, or other properties. By only paying the interest on the mortgage, they can free up more money to invest elsewhere.
Finally, interest only mortgages can be beneficial for those who anticipate a large increase in their income in the future, or those who have a lump sum of money coming to them, such as an inheritance or a bonus. With an interest only mortgage, they can still purchase the property they want now, and then pay off the capital at a later date.
What are the disadvantages of an interest only mortgage?
The main disadvantage of an interest only mortgage is the risk of negative equity. Negative equity occurs when the value of the property falls below the amount owed on the mortgage. With an interest only mortgage, the borrower is not paying off any of the principal, which means that if the value of the property decreases, they could end up owing more than the property is worth.
Another disadvantage is that interest only mortgages can be more difficult to obtain than repayment mortgages. Lenders are becoming increasingly strict with their lending criteria, and may require a larger deposit, proof of a repayment strategy, or a higher income than for a repayment mortgage.
Finally, at the end of the mortgage term, the borrower will still owe the full amount borrowed. This means that they will need to have a repayment strategy in place to ensure that they can repay the loan.
What happens at the end of an interest only mortgage?
At the end of an interest only mortgage, the borrower will still owe the full amount borrowed. They will need to have a repayment strategy in place to ensure that they can repay the loan. The repayment strategy will need to be agreed upon with the lender when the mortgage is taken out, and will typically involve investing in an ISA, pension, or other savings account.
What happens if you can’t repay an interest only mortgage at the end of the term?
An interest only mortgage may seem like an attractive option for some borrowers, but there is a risk involved if you can't repay the loan at the end of the term. If you are unable to repay the loan, you could face significant financial consequences, including losing your home.
There are several options available to borrowers to mitigate the risks of being on an interest only mortgage.
- Overpaying on your mortgage
One way to ensure that you have enough money to pay off your mortgage at the end of the term is to overpay on your mortgage. By overpaying, you can reduce the amount of interest you pay over the term of the loan, which will reduce the overall amount you owe at the end of the term.
- Switching to a repayment mortgage
If you're concerned about being unable to repay your interest only mortgage at the end of the term, you could consider switching to a repayment mortgage. A repayment mortgage involves paying off both the interest and the capital over the term of the loan. This means that you will own your home outright at the end of the term, and there will be no need to find a lump sum to repay the loan.
- Opting for a retirement interest only (RIO) mortgage
Another option for borrowers who are unable to repay their interest only mortgage at the end of the term is to opt for a retirement interest only (RIO) mortgage. RIO mortgages are designed for older borrowers who may have limited income in retirement. These mortgages allow you to continue paying only the interest on your loan, but the loan will be repaid when you die or sell your home.
- Extending your mortgage term
Another option for borrowers is to extend the term of their mortgage. This can reduce the monthly payments, but it will also mean that you'll pay more interest over the lifetime of the loan.
You could also consider remortgaging to a different lender at the end of the term. This can give you access to a wider range of mortgage products and may allow you to find a better deal.
- Selling the property
If you are unable to repay your interest only mortgage and have no other options available, you may need to consider selling your property. While this may not be an ideal solution, it will allow you to repay the loan and avoid losing your home.
- Part and Part
This is an option where you take part of the loan on an interest only basis and part of the loan on a repayment basis. This means at least part of the loan is repaid, reducing the amount you need to repay at the end of the mortgage term.
In conclusion, an interest only mortgage can be a useful financial tool for some borrowers, but it's important to understand the risks involved. If you are considering an interest only mortgage, it's essential to have a plan in place to repay the loan at the end of the term. If you're unsure whether an interest only mortgage is the right option for you, speak to an experienced adviser at Hello Mortgage and we can search the whole of market and also give you all the initial advice you need for free.
No advice will be provided by Hello Mortgage Limited, as to the suitability of any pension arrangements or investments intended to provide for a retirement income or to settle an interest only loan at the end of the mortgage term.
A mortgage arranged on an interest-only basis. This means you will not make any repayments towards the capital of the loan and will have the full loan balance to repay at the end of the mortgage term.
It is your responsibility to ensure that you have a suitable repayment plan in place to pay off the total mortgage balance at the end of the agreed term.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON ANY LOAN SECURED AGAINST IT