With an interest-only mortgage, you must have a plan to pay back the full mortgage amount by the end of your repayment term. This is sometimes referred to as a “repayment vehicle”.

Examples of repayment vehicles can include endowment policies, pensions, ISAs or the sale of the property itself. Lenders have varying policies for accepting repayment methods for interest-only mortgages. These policies depend on the plans and investments that lenders are willing to consider. Some lenders may not accept cash in a savings account as a repayment method for an interest-only mortgage.

Who might be suited to an interest-inly mortgage?

Interest-only mortgage repayment is suitable for various types of borrowers. This includes first-time buyers, home movers, buy-to-let investors, and those looking to remortgage.

Whilst interest-only does not suit everyone a couple of examples of where it could help are as follows:

Buying a property with an interest-only mortgage may be cheaper than renting a property. Some home buyers feel that, while you may not be paying off the actual loan you do own your own home.

Many buy-to-let investors choose interest-only mortgages to keep their monthly mortgage payments low. They can also make additional payments towards the loan if needed. Interest-only can help if investors are looking for capital growth rather than longer-term income.

The benefits of interest-only mortgages can also apply to:

• self-employed
• contractors
• freelancers
• and others who may have an irregular monthly income.

What is a part-and-part mortgage?

As the name perhaps suggests, a “part-and-part” mortgage is part repayment and part interest-only. With this type of mortgage, you would have a repayment vehicle that only covers part of the total mortgage debt. For example, let us say you take out a £100,000 mortgage, but only have a repayment vehicle covering £75,000. £75,000 of the mortgage is interest-only, and the other £25,000 is repayment.

Your monthly mortgage payment consists of two parts. One part is the interest on the total mortgage amount. The other part is a portion that goes towards repaying the £25,000 over the agreed term.

After the mortgage term ends, your remaining mortgage balance of £100,000 will decrease to £75,000. This amount will be paid off using the right repayment method.

Part-and-part mortgages offer a middle ground between a full repayment mortgage and a full interest-only mortgage. Monthly payments are lower than on a repayment mortgage. You pay less interest because part of the mortgage balance is being repaid.

Differences between interest-only and repayment mortgages

A repayment mortgage is different. It includes monthly payments for loan interest and repayment of the borrowed amount over an agreed term. Repayment mortgages are sometimes referred to as “capital and interest” mortgages, to differentiate them from interest-only mortgages.

Interest-only mortgages have lower monthly payments compared to repayment mortgages. This is because the payment only covers the interest and not the mortgage capital. However, since the balance isn’t decreasing, the total interest paid on the mortgage is higher compared to a repayment mortgage.

Interest Only Mortgage lenders

Interest only mortgages have been popular for a long time. However, the market in interest-only mortgages reduced after the decline of endowment policies. The expected growth in many endowment policies did not meet the sum owed on the mortgage. Ultimately, leaving a large number of homeowners in financial difficulty.

Borrowers increasingly opting for the safer repayment mortgage. Lenders also perceived interest-only mortgages as a far greater risk.

However, interest-only mortgages are still available through a number of lenders in the market. Although, access to their products will be subject to certain minimum standards and criteria.

• You can demonstrate a suitable repayment vehicle as acceptable by the lender
• Have the minimum income required by some lenders
• Have the minimum sized deposit or minimum level of equity
• and meet any other criteria required by the lender,

Interest-only mortgage advice

If you are looking to take out an interest-only mortgage, then it is important to seek professional advice on your plan. Even if you are supremely confident that this is the right option for you.

An interest-only arrangement can seem very attractive in the immediate circumstances. With its cheaper monthly payments, it can be an effective way to keep your ongoing costs down. All while maintaining a growing asset or storing up an investment for the future.

However, you have to be absolutely certain that you will be able to repay the loan when it comes to term. Lenders will require you to have an acceptable ‘repayment vehicle’ in place before they can accept your application.

This could be:

• a pension,
• endowment policy,
• ISA,
• or other investment fund that accrues interest,

Or, perhaps you will simply plan to sell the property, assuming that it will have held its value throughout the duration of the loan. This entails an element of risk, as many historic holders of interest-only mortgages with insufficient endowment.

Get in touch today to arrange a free, no-obligation initial discussion, and we’ll give you a clear picture of all your options going forward.