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Prior to the 2008 financial crisis, interest-only mortgages were mainstream. This was predicated on the belief that prices would only ever increase, so the mortgage holder would build up equity in time and realise that in a sale. The credit crunch put an end to that theory and interest-only suddenly became a rare and niche product because lenders viewed it as high risk.
However, it is still a very useful mortgage in several situations, which we will touch on here.
What are the advantages of an interest-only mortgage?
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More affordable monthly payments
As mentioned, one the most evident benefits of an interest-only mortgage is that it comes with smaller monthly instalments. This is because, in effect, you’re only paying the interest charges on your mortgage loan. If someone has a short term need to preserve money, they could choose this, retain the mortgage and property and just service their interest-only loan before switching back to a repayment mortgage.
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Later life
One area of growth is for older people, who are getting mortgages later in life and many utilise an interest-only mortgage with the long-term intention to sell and downsize later in their retirement.
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Valuable option for buy-to-let owners
An interest-only mortgage is often seen as a good solution for buy-to-let landlords. In fact, as they receive regular monthly payments from their tenants, landlords can put aside their profits to pay back the full capital when the time comes.
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You can budget and invest your savings
Another advantage is that, with an interest-only mortgage, you have the opportunity to budget and save on your mortgage repayments. You could use what you’re saving to add value to your new property or meet other living costs.
What are the disadvantages of an interest-only mortgage?
If you’re thinking about getting this type of mortgage loan, you may want to consider these aspects too:
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Likely to be more expensive overall
Bear in mind that, with an interest-only mortgage, the capital you owe does not decrease over time. Plus, you’ll have to pay interest on the whole amount too. This means that, overall, an interest-only mortgage is likely to be more expensive than a repayment loan. At a time when interest rates are high, this makes it even more expensive.
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Banks and lenders view it as 'high risk'
Because an interest-only mortgage requires you to pay one large lump-sum at the end of your term, banks and lenders see it as a risky type of mortgage loan. Lenders may have restrictions on loan to value and require certain repayment vehicles.
How can you pay off an interest-only mortgage?
Options to pay off the loan could include selling the property, switching to a repayment mortgage, making over-payments, or saving and investing elsewhere. Whichever route you choose, make sure you review your plan regularly, so that you know it will cover the amount you need when the time comes.
How can a mortgage adviser help?
A mortgage broker has access to all mortgage lenders, many have set rules on interest only lending with restrictions on age, income, loan to value, minimum equity and a set repayment vehicle- sale and downsize is not an acceptable exit route for some lenders. We are able to advise on whether an interest only mortgage is suitable, check understanding of how this is to be repaid and place with the correct lender to match those needs.
There are a lot of people with interest only mortgages that may be coming to an end soon without a repayment strategy. We can help clients to understand their long-term plans and try to source longer term mortgage options for them.
Don’t leave it too late though! It’s important not to wait until a couple of months before the interest only balance is due as the lenders will be expecting the debt to be repaid and this will reduce your options.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate most forms of buy to let mortgages.
