Last updated: 2nd April 2020
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Interest-only mortgages are mortgage deals where you only pay back interest, not the capital or loan amount.
It means that your repayments are lower, because you're only paying interest. But at the end of the term, you will still owe the full amount of your loan… and the lender will expect you to pay it back.
Let's take a £150,000 loan at 3% over 25 years.
With a repayment mortgage, you're repayments would be around £710 a month and you'd repay £213,000 in total – £63,000 in interest plus your £150,000 loan amount.
With an interest-only mortgage, your repayments would be around £375 a month and you'd repay £262,000 in total – £112,000 in interest plus your £150,000 loan amount.
With a regular repayment mortgage your monthly repayments cover both interest and loan repayments. So, as the loan matures, you actually pay less interest because your loan amount gets smaller.
As you can see, you're paying a lot more back in total with an interest-only loan, but your monthly repayments are a lot lower during the term.
So, if you’re struggling to find mortgages with manageable monthly payments, hope isn’t necessarily lost. An interest-only mortgage might be the way to go.
There's also that big lump sum at the end to think about. It looks really daunting being asked to pay back £150,000 (for example) at once. But in fact, you have 25 years (in this case) to prepare for it.
You could choose to invest the savings you make on the monthly repayments. However, more commonly, people hope their equity helps make up some of the lump sum.
For example, according to Land Registry data, 25 years ago, the average home in the UK was valued at £57,000.
Now, in 2020, the average home in the UK is valued at almost £224,000.
That in itself is a rise of £167,000 more than enough to pay back the £150,000 lump sum.
The advantages of interest-only are:
The disadvantages of interest-only are:
Lenders see interest-only options as much riskier than repayment mortgages.
Interest-only was more common prior to the 2008 financial crisis – and back then you didn't even need to show a lender how you intended to repay the capital sum.
Once the economy hit the skids, people found it difficult to repay their loans at the end of the terms.
Now, not all lenders offer interest-only mortgages, if you're determined to check out interest-only mortgage lender, expect to be asked to have:
However, each lender will have their own eligibility criteria. Nationwide, for instance, has recently re-entered the interest only mortgage market. They are offering the deal via intermediaries – brokers like Mojo. They ask for:
Buy-to-let interest-only mortgages are the exception. In the buy-to-let market, interest only mortgages are actually the norm. You can read more about that in our full buy-to-let mortgage guide.
The FCA states "retirement interest-only mortgages are loans for older consumers where the lender will not seek repayment of the loan until a specified life event (usually the customer’s death or move into residential care). At that point the loan is repaid through the sale of the property".
Retirement interest-only mortgages were reclassified from equity release products to mainstream mortgages in 2018. The regulation change was meant to result in more lenders entering the market. Since their launch the number of products available has risen from 5 to 74.
You can get mortgage deals like this. You'll be asked to state what sum you want as interest-only and what sum, you'll want as repayment. Also, bear in mind not all lenders will offer this, so your options may be very limited.
There's a good chance your lender will be happy to facilitate a switch to a repayment option – as mentioned, it represents less risk for them.
If you're concerned about repaying your capital loan sum at the end of the remortgage speak to your lender as soon as possible.
As well as switching, some of the options that may be available to you include:
If you’re unsure whether or not an interest-only mortgage could be right for you, our advisers can help. If you just want to check what rates are available, let's beginSee my options and rates
Here's a few other articles you may find useful.
How does a vale rate work? What options are out there, and the pros and cons of choosing a variable rate mortgage.
Fixed rate mortgages can give you the peace of mind of knowing what your repayments will be every month – any drawbacks?