Last Updated: February 2nd, 2024 at 6:38 pm
Considering an Interest Only Mortgage brings up many important questions. Here, we aim to address these queries with detailed and informative answers, akin to a one-on-one session with a mortgage broker, to help you understand if this mortgage type suits your needs.
In an Interest Only Mortgage, your monthly payments only cover the interest on the loan. The principal, or original loan amount, remains unchanged. At the end of the mortgage term, you’re required to pay back the entire principal amount, either through savings, investment returns, or by selling the property.
Unlike Repayment Mortgages, where each payment goes towards both the interest and reducing the principal, Interest Only Mortgages don’t chip away at the principal. This means your monthly payments are lower, but you’ll still owe the full loan amount at the end of the term.
Interest rates on Interest Only Mortgages can be similar to or slightly higher than those on Repayment Mortgages, depending on the lender’s policy and your financial profile. The rate reflects the lender’s assessment of risk in lending to you.
Yes, many lenders allow you to switch from an Interest Only to a Repayment Mortgage. This might be a strategic move if your financial situation changes and you wish to start reducing the principal.
Lenders look at your ability to repay the principal at the end of the term. They assess your income, credit history, and most importantly, your repayment strategy – whether it’s through selling another property, investments, or other assets. They also consider the loan-to-value (LTV) ratio, often requiring a larger deposit for Interest Only Mortgages.
You’ll need to provide concrete evidence of how you plan to repay the loan. This could be by selling the property when the mortgage is up, documentation of investments, savings plans, additional property assets, or other substantial financial resources. The lender needs assurance that your strategy is viable and reliable.
If you’re unable to repay the principal at the end of the term, you might have to sell the property to cover the loan. Alternatively, you could refinance the mortgage or switch to a Repayment Mortgage, but this depends on your financial situation and lender’s policy at that time.
For property investors, Interest Only Mortgages can be appealing as they allow for lower monthly outgoings, potentially improving cash flow for other investments. However, it’s vital to have a robust plan for repaying the principal, considering the investment risks and market fluctuations.
Consider your long-term financial stability and ability to repay the principal. Assess the risks involved, such as market changes affecting property value. Ensure your repayment plan is solid and have a backup in case your primary strategy doesn’t materialise. It’s also wise to consult with a mortgage advisor to explore all options and implications.