An alternative to capital repayment mortgages
For some people, an interest-only mortgage can offer greater flexibility than a repayment one. They are an attractive option for many, but there are also some risks associated with them. Think Plutus can assess your suitability for this type of mortgage when you seek advice from our expert team.
What is an interest-only mortgage?
As you might imagine, an interest-only mortgage is all about paying just the interest charged each month throughout the term of your loan. You don't have to repay the amount you borrowed until you reach the end of the agreed term.
By paying the interest accrued every month, you prevent the mortgage balance going up, but you don't pay any of that balance off. This is why you have to pay the balance off in full either at the end of the mortgage term, or when the property is sold. Interest-only lenders require borrowers to provide evidence of a suitable vehicle for repayment.
What are the benefits of interest-only mortgages?
The expert mortgage advisers as Think Plutus have extensive knowledge and experience of the mortgage market in the UK. When you come to us, you will get a detailed explanation of all the options at your disposal. Interest-only mortgages will be one of these, particularly if any of the following apply to you:
- Your work awards you large bonus payments
- You have plans to downsize in the future
- You own assets that could be sold off to repay the balance in an interest-only mortgage
- You are a high net worth individual
- You are self-employed
- You are an older borrower
- You have another means of repaying an interest-only mortgage
It is important that you meet at least one of these criteria because an interest-only mortgage requires you to pay off the balance at the end of the term. This is usually achieved by either using a repayment vehicle, like an ISA, investment fund or pension, or by using a lump sum like an inheritance or pension withdrawal. There is an element of risk, and an interest-only mortgage is often more complex and, ultimately, more expensive. However, they offer the following key advantages:
- Low monthly payments
- Flexibility to choose where your money goes
- Potential to make a profit if your investments perform well
Why Think Plutus? Interest Only Mortgage Broker
At Think Plutus, we have a team of professional, specialist mortgage advisers with whole-of-market access to the mortgage product market. We can assist in identifying the right kind of mortgage for your situation, no matter the type of job you have or the nature of your employment. We'll offer up-to-date, actionable insights and advice from a place of real expertise and genuine experience to give you the greatest possible chance of success with your application. To secure the mortgage that's right for you, Think Plutus.
Frequently Asked Questions
Your monthly repayments on an interest-only mortgage only cover the interest accrued, so the balance of the mortgage remains. At the end of the term, you still owe the same amount you originally borrowed, unless you have made any other capital reductions during the term of the mortgage. This means that the mortgage balance must be paid off in full once you reach the end of the mortgage term in your initial agreement. In most cases, there will have been an agreed repayment vehicle to achieve this, such as an endowment policy, an ISA, or an alternative investment plan.
An existing interest-only mortgage might have been set-up with an approved savings plan in mind, like an endowment policy or an ISA, for making the final repayment. In some cases, the sale of the mortgaged property is the repayment plan, and will occur at the end of the mortgage term. If the value of the property increases over the years, you may find yourself in a position to make the repayment and use the remaining equity to purchase a less valuable property.
If you are considering a new interest-only mortgage, many lenders will not consider selling the property as a safe repayment plan. They would need to know you have another way of making the repayment. That said, there are some lenders who will still accept the sale of the mortgaged property as a suitable repayment vehicle, and we can help you find one.
In a word: yes. Under current mortgage rules, lenders must be satisfied that you can afford your monthly payments and that you have a suitable repayment vehicle in place to pay the balance at the end of the mortgage term. The lender will seek verification of this during the application process, and may follow up on this during the mortgage term to ensure you are on track to pay the debt.
In the past, the requirements for interest-only mortgages were less stringent. If you have an existing interest-only mortgage and are not on track to pay the full balance when the term ends, you should contact your lender immediately to discuss alternative options.
Some lenders will allow customers to make the switch from a repayment mortgage to an interest-only one. Those that do will require you to verify that you have a suitable strategy in place to repay the mortgage once you reach the end of the agreed term.
The majority of lenders will allow customers to make the switch from interest-only to repayment mortgages within the mortgage term. There may also be an option to move it to a so-called 'part-and-part' basis, meaning part of the mortgage remains interest-only and the rest switches to a repayment basis. This is a useful resource when you have a repayment vehicle in place which is unlikely to pay out the full amount required once it reaches maturity.