What is an interest-only mortgage?

If you’re currently arranging or rearranging a mortgage you might have come across the term ‘interest only’ and you might even be wondering why the payment quoted for ‘interest only’ is so much lower than for a repayment mortgage.

As I’m sure you know when a mortgage lender issues you a loan for which they charge you interest. When you take out an interest-only mortgage the payments you make to the lender cover the interest alone and you are not repaying any of what you owe back. So if you borrowed £100,000 at the start of the mortgage you will still owe £100,000 at the end of the loan too.

So why would anyone take out an ‘interest only’ mortgage?

Many years ago people took out interest-only mortgages in tandem with an investment usually an endowment but more recently an ISA. They hoped that when the loan came to an end the investment would be worth more than the loan so they would have some extra money left over. Unfortunately for many people, this didn’t work out and they had a shortfall, so people tend not to enter into this sort of plan anymore.

So why do interest-only mortgages still exist?

They certainly aren’t as popular as they were, but they still have a purpose. People already partway down the investment road will likely need to keep part of their mortgage on an interest-only basis, usually converting part to repayment to cover any potential shortfalls.

Another group of people likely to give serious consideration to an interest-only mortgage are buy to let investors. As the property is not a home but an investment in itself that they may be prepared to sell in the future then they will often be unconcerned with the balance going down as they will sell the property to repay the mortgage at some time in the future. Hopefully having made some profit from both the difference between the interest-only mortgage payment over the years and from growth in the property value too. Of course, this is not without risk, the property value could always fall and be worth less than the mortgage right when the owner wants to sell.

Since the Mortgage Market Review (MMR) conducted by the financial services regulator in 2012, it has become much more difficult to obtain an interest-only mortgage than ever before. Every lender will now expect you to demonstrate your plan for final repayment of the loan and for that plan to be ‘realistically likely’ to be able to ensure the mortgage is redeemed.

If you have any further questions feel free to reach out and ask, using any of the contact methods on this page.

For mortgage advice, we charge new clients a £200 fee payable at the point of completion and we will receive a fee from the mortgage provider for arranging the mortgage. The £200 fee is waived for existing clients as we can provide mortgage services to existing clients with more time efficiency.

Your home may be repossessed if you do not keep up repayments on your mortgage.