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What are interest only mortgages?

With mortgages, it’s important to recognise that not everyone’s situation is the same and, in some circumstances an interest only mortgage product may be more suitable for a client.  

With an interest only mortgage product, you’ll make monthly payments that will consist of purely interest, no capital will be repaid during the term.   

At the end of the interest only mortgage term, you’ll be asked to repay the full loan amount back as a lump sum, you’ll need the funds available to do this.  

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Can I get an interest only mortgage?

If you are considering getting an interest only mortgage, it’s important to seek trusted advice from a reputable mortgage broker as there are lots of considerations.  

Due to the higher risk involved, not all mortgage lenders have interest only mortgage deals available, and those that do have strict criteria to meet along with more vigorous underwriting.  

Usually, the characteristics of an interest only mortgage borrower is they are a high earner, often with a large pension pot, a good credit score, has various investments/assets, and has a large deposit to put down as security.

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How do interest only mortgages work?

Interest only mortgages work by allowing you to pay a monthly payment of just interest therefore keeping the cost of the mortgage to a minimum.   

No capital is repaid during the term of an interest only mortgage, at the end of the term, you’ll be required to repay the full loan amount in one lump sum or risk repossession.  

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FAQs Interest Only Mortgages

My interest only mortgage is ending soon, what are my options?

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Your current mortgage lender will start writing to you well in advance of your interest only mortgage ending.  If you haven’t got the lump sum available to repay the loan in full, it’s important to leave enough time, 6-12 months is ideal, to plan and to get another mortgage in place. 

If so, we can explore your options which include a remortgage to a new lender or a more specialist mortgage such as a RIO mortgage (retirement interest only) or equity release mortgage plan.  

The options available to you to stay in your property will depend on your age, current and future income, credit score, property type and loan to value.  If you are looking to sell or downsize at this time, your current mortgage can be repaid using your equity.   

We have both regular mortgage brokers who can help along with a more specialist later life mortgage team to explore every option available to you.  

If you are an older borrower, you can read more about your mortgage options here: 

What are my interest only mortgage options?

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With an interest only mortgage deal, you’ll pay a monthly payment every month, like a regular mortgage. 

However, unlike a regular mortgage, you will not be repaying any capital. The amount you owe your mortgage lender will be the same at the end of the mortgage term. 

An interest only mortgage is classed as high risk and more affordability and criteria checks will be undertaken by the lender. 

For some security, you can fix your interest only mortgage rate also, typically over 2, 3 or 5 years. 

There is also a range of later life mortgage products available including a retirement interest only (RIO) mortgage product and equity release options which can be used for either a new property purchase or remortgage. 

As a mortgage broker, it’s important to us that you get professional advice for your individual situation. 

Book your free mortgage appointment with one of our mortgage advisors today. 

Who are interest only mortgages best suited for?

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When you apply for an interest only mortgage the lender will want to know what your “repayment strategy” is, how you will pay back the capital sum at the end of the term. 

In many instances, if you are a higher earner and have investments and/or a good-sized pension pot in the background, you’ll stand more chance of being accepted. This will also apply to clients with property portfolio or business owners. 

You’ll need to evidence a robust mortgage repayment method for 100% of the loan amount by the end of the term.  This will usually be from a pension lump sum, inheritance or cashing in an investment.  

Are interest only mortgages a good idea?

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Whether an interest only mortgage is a good idea or not depends on your individual financial situation and goals. 

For some borrowers, interest only mortgages can be a useful tool for managing their finances and achieving their objectives, while for others, it may not be the best option. 

The main advantage of interest only mortgages is that the monthly payments are lower than with a traditional repayment mortgage. 

This can be helpful for borrowers who need to manage their cash flow or have other financial goals, such as investing or saving for retirement. 

Additionally, some borrowers may be able to invest the money they save on monthly payments, potentially earning a higher return than the interest rate on their mortgage. 

There are also risks associated with interest only mortgages. If the value of the property decreases, the borrower may end up owing more than the property is worth, making it difficult to sell or refinance. 

Overall, whether an interest only mortgage is a good idea for you depends on your financial goals, circumstances, and whether it could be a financial risk to you. 

It’s important to carefully consider the pros and cons of interest only mortgages and to seek expert mortgage advice before deciding. 

Can you still get an interest only mortgage?

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Yes, it is still possible to get an interest only mortgage, but the criteria for obtaining one may be stricter than it was in the past. 

Mortgage lenders may require a higher deposit or equity in the property, and borrowers will need to provide evidence of a credible repayment plan for when the interest only period ends. 

This repayment plan could include the sale of the property, investments, savings, or other assets. Additionally, borrowers may need to demonstrate a steady and reliable source of income to support their ability to repay the mortgage. 

It is important to speak with a qualified mortgage advisor to assess your eligibility for an interest only mortgage and to explore other options that may be more suitable for your financial circumstances.

What is the criteria for interest only mortgages?

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The criteria for interest only mortgages can vary between lenders, but generally, borrowers will need to have a good credit score, a reliable source of income, and a substantial deposit or equity in their property. 

Mortgage lenders will also typically require the borrower to have a clear and realistic repayment strategy in place for when the interest only term ends, such as investments or a sale of a property. 

The borrower will need to demonstrate that they can afford to make the monthly interest payments and that they have the means to repay the full loan amount at the end of the term. 

Additionally, some mortgage lenders may have age restrictions for borrowers, and some may only offer interest only mortgages for certain property types or purchase purposes. 

It’s important that you speak with a qualified mortgage advisor to understand the specific criteria and requirements for an interest only mortgage. 

Can you release equity on an interest only mortgage?

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Yes, it is possible to release equity on an interest only mortgage through various means. One way to release equity is through remortgaging to a new interest only mortgage with a higher loan-to-value (LTV) ratio or via a further advance mortgage with your existing lender.  

Depending on your age other products may be more suitable such as retirement mortgages, a longer-term regular mortgage, interest only or repayment depending on your affordability. 

Alternatively, you could consider equity release products such as a lifetime mortgages, which allows you to release equity without making any repayments until you sell the property or pass away. 

Should I take out an interest only mortgage or a lifetime mortgage (equity release)?

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Firstly, there are lots of products available on an interest only basis from age 50, so if you are an older client looking to explore your mortgage options then it’s always best to speak with an independent professional later life mortgage broker for a recommendation.  

Your mortgage broker will consider your personal situation, presently and in the future along with your objectives to recommend the best way forward.  

A lifetime mortgage should always be considered as a last resort before all other mortgage types have been discounted for one reason or another.  

The mortgage lenders are being very proactive in this later life space at the moment and there are some brilliant products now available to our older clients.  

Can you pay off interest only mortgages early?

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Yes, it is possible to pay off interest only mortgages early.   It’s best to wait until you’re out of your fixed rate deal to make any large lump sum payments as there may be early redemption charges to pay.  Double check with your lender here as they all have slightly different rules when it comes to both regular and lump sum overpayments.  

Making overpayments when you can can be a good strategy to help reduce the overall amount of interest paid over the life of the mortgage. 

By making extra payments towards the capital balance, borrowers can reduce the amount owed and pay off the mortgage faster. 

It is important to note, however, that some mortgage lenders may present you with an early repayment charge for paying off the mortgage before the end of the term, so borrowers should check with their mortgage lender before making any extra payments. 

It’s also important to ensure that any extra payments are applied to the principal of the loan and not just to future interest payments. 

Can you get an interest only mortgage if you’re self employed?

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Whether you are employed or self employed you’ll need to evidence your income to prove to your lender that you can afford your new mortgage. Self employed mortgages are available on an interest only basis.   

You’ll need to evidence your income with the various documents that apply to you and how your company is set up such as your SA302s, tax returns, payslips, p60, company accounts etc.  

Typically, interest only mortgage customers are high earners with a big deposit available to put down, thus reducing the risk for the lender.  Maybe they have saved up big pension pots, have a large inheritance coming soon or have alternative investment such as shares or a property portfolio.  

Can you get an interest only mortgage with bad credit?

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It may be possible to get an interest only mortgage when you have bad credit registered against you, however, it’ll be harder and there’ll be more hoops to jump through.  

Bad credit mortgages are available for borrowers with county court judgements (CCJ), defaults, and missed payments etc.  

Whether you will qualify for a bad credit mortgage will depend on the level of your income, what the bad credit was and how when it was registered and the amount of deposit you have available.   

The bigger your income and deposit the better your chances are of being accepted. Also, the more historic and smaller the bad credit is that is registered against you will help.  

The most popular type of bad credit lending is getting a mortgage with a CCJ.  With an experienced mortgage broker on your side it is usually possible to help get accepted for an interest only mortgage.  

What is a term interest only (TIO) mortgage?

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Term Interest Only (TIO) mortgages are a type of mortgage where the borrower only pays the interest on the loan for a fixed term, usually between 5 and 25 years. 

This means that the monthly payments are lower than those of a repayment mortgage, but at the end of the term, the borrower will need to repay the full amount borrowed. 

TIO mortgages are often attractive to borrowers who have a specific financial goal in mind and need to manage their monthly expenses carefully. 

For instance, if someone needs to save for their child’s education, they might choose a TIO mortgage with a term that aligns with their saving goals. 

However, it is important to note that TIO mortgages can be riskier than repayment mortgages, as the borrower is not reducing the loan balance over time. 

This means that the borrower must have a solid plan in place to repay the full amount at the end of the term. 

What is a retirement interest only (RIO) mortgage?

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Retirement interest only (RIO) mortgages are a type of interest only mortgage designed specifically for older borrowers who have retired or are nearing retirement. 

Retirement interest only mortgages are designed for older borrowers age 55+ and can be joint or in a sole name. RIO mortgages are part of our later life lending products that we have available and can be a good alternative to an equity release plan for the right applicant/s.  

Instead of making monthly payments on the principal, the borrower pays only the interest on the loan each month. Typically, the mortgage is repaid when the borrower passes away or moves into long-term care. 

For borrowers with significant equity in their property, RIO mortgages can be an attractive option. They can use the equity to supplement their retirement income, pay off debts, or make home improvements. 

That being said, RIO mortgages may have slightly higher interest rates compared to other mortgage types, and the borrower may not be able to borrow as much as they could with a traditional mortgage. 

RIO mortgages are a suitable option for those who are looking to downsize and move to a smaller property or need to move into long-term care. The borrower can use the proceeds from the sale of their property to repay the mortgage balance. 

It’s worth noting that RIO mortgages can also provide an option for borrowers who don’t want to sell their property, but still want to access the equity to help fund their retirement. 

Why use a mortgage broker for interest only mortgages?

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Using a mortgage broker to help you get an interest only mortgage can be a smart decision. As a mortgage broker, we have access to a wide range of mortgage lenders and mortgage products, including those that are not available to the public. 

We are also able to provide expert mortgage advice on the different types of mortgages available, their pros and cons, and how they might suit your specific financial situation. 

Part of our job is to identify the mortgage lenders that are likely to be more flexible in their lending criteria, as well as helping you to prepare the necessary documentation to support your mortgage application. 

It is our mission to save you time and money, and can help to ensure that you are well-informed and well-prepared throughout the entire mortgage application process. 

Book your free mortgage appointment online and speak with a mortgage advisor today. 

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Pros & Cons of Interest Only Mortgages

4 Advantages of Interest Only Mortgages

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  1. Lower Initial Payments – During the interest-only period, clients will pay only the interest on the loan, resulting in lower monthly payments compared to a traditional mortgage.  At the end of the term, your mortgage lender will write you requesting the full repayment of the loan.
  2. Cash Flow Flexibility – An interest only mortgage can be beneficial for those who are expecting a large cash inheritance, pension or to cash in an investment in the future.
  3. Investment Opportunities – For the right client such as a buy to let investor, they extra cash they save each month to invest elsewhere, aiming to generate higher returns than the mortgage interest rate.
  4. Short-term Homeownership – For clients planning to sell the property within a few years, the lower initial costs of an interest-only mortgage might be advantageous.  Examples would be you currently have elderly parents or teenagers living with you and you have a clear plan to downsize in the medium-term future.  

5 Disadvantages of Interest Only Mortgages

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  1. Repaying the loan – Once the interest only mortgage period ends, borrowers must start paying both the capital and interest back to the lender, resulting in significantly higher monthly payments. This can catch borrowers off guard if they haven’t prepared.  Also, you’ll be older and your lending options maybe more limited to retirement mortgages.
  2. Risk of Negative Equity – If property values reduce, borrowers might owe more than the home is worth when it’s time to start paying the principal. This situation can lead to financial difficulties if you were looking to take out a new mortgage on the property.  Unlike a regular repayment mortgage, you will not be building up equity in the property by repaying the loan.  Your increase in equity will be determined by house prices which can increase or decrease over the term of your interest only mortgage.
  3. Investment Risk – Relying on investments to cover the principal repayment can be risky. If the investments perform poorly, the borrower may struggle to pay off the mortgage.  Examples of this include endowments and shares invested in the stock market.  Also, we know from history that investing in stocks isn’t always rosy, we see large fluctuations in performance when economic events occur such as covid or a change in government.
  4. Criteria & Affordability Requirements –  Lenders often have stricter requirements for interest only mortgages, including higher credit scores and larger deposits, which might limit accessibility to these loans.  Having an experienced mortgage broker working on your behalf will prove beneficial here.
  5. Potential for Misuse – Clients might not have a clear repayment plan in place or might misuse the lower initial payments.  This could result in future stress and repossession of your home in later life when your lending options are more limited, and your income is potentially lower.  For interest only mortgages to work well, a clear repayment strategy must be in place from the start. Your mortgage lender will require you to evidence this.   

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