An interest-only mortgage is a type of repayment method for mortgages. Instead of repaying the loan through monthly repayments like a capital and interest mortgage, with an interest-only mortgage you only pay the interest due on the loan each month.
This means that at the end of the term you still need to repay the original loan amount back to the lender.
For example, if you borrow £200,000 over 25 years, because you are only servicing the interest you will need to pay £200,000 at the end of the 25-year term.
There are different ways you can repay your interest-only mortgage at the end of the term, these are called repayment strategies and the lender is required to ensure that you have a credible repayment strategy when you take out an interest-only loan.
The most common repayment strategies are to either:
Expected inheritance is generally not considered a suitable repayment strategy.
It should be said that the criteria for interest-only buy to let mortgages is different as these mortgages are unregulated which means that the criteria are more flexible. Most landlords will take a buy-to-let mortgage on an interest-only basis in order to make a profit on the rental income.
The main advantage of an interest-only mortgage is that it has reduced monthly repayments giving flexibility to investing the available disposable income you would be required to pay back on a capital and interest mortgage elsewhere. They can have lower affordability requirements as the monthly repayments are lower which can be useful for older borrowers who are not ready to downsize and have sufficient equity or available assets.
You will pay more interest over the long term with an interest-only mortgage as the debt is never reducing. You need to ensure that any repayment strategy remains in place otherwise there could be serious financial consequences when you get to the end of the term.
The main qualification for an interest-only mortgage is that you have a credible repayment strategy in place, this means the lender can be confident that you will repay the loan at the end of the term.
Other factors such as your credit score, income, and outgoings are also taken into account when assessing your eligibility for an interest-only loan some typical requirements lenders need are;
Momentum Mortgages are mortgage brokers based in Sevenoaks, Kent. We help people to buy, invest or remortgage property while reducing stress and saving time. We have helped clients all over Kent including Tunbridge Wells, Tonbridge, Maidstone, Swanley, Dartford, Bromley, Orpington and more.