Mortgages - Interest only mortgages
An interest only mortgage is one way to repay your mortgage, the information below will help you to decide whether an interest-only mortgage is right for you.
What is an interest-only mortgage?
An interest-only mortgage means your monthly payments cover only the interest on the loan. They do not pay off the amount you owe. So, at the end of the mortgage term, assuming you have made all the interest payments, you will owe the same amount that you borrowed at the beginning. You need to have a lump sum available to pay the mortgage back in one go at this time.
Make sure you make arrangements to pay off the loan when the mortgage ends. If you don't, you could lose your home.
How to pay off an interest-only mortgage
If you choose an interest-only mortgage, make sure you know from the outset how you intend eventually to pay off the loan. You don't have to arrange this through your lender. Your main options are to:
Save regularly
You make payments into a savings or investment scheme each month to build up a lump sum to pay off the loan when the mortgage term ends (or sooner if you can afford it). There is a risk if the savings plan does not build up a big enough lump sum by the end of the mortgage term.
Convert to a repayment mortgage later
This might be a suitable option if, say, your earnings are low now but are expected to be much higher in future, for example, when you've finished training or gained professional qualifications. Using an interest-only mortgage keeps your monthly payments down until you can afford the higher monthly payments of a repayment mortgage.
Because you're putting off repaying the capital you will end up paying more interest and more in total for your mortgage over the term.
Use a lump sum from somewhere else
For example an inheritance, or selling something such as another property or a business. This is usually a risky strategy - how sure are you that the inheritance will materialise, what happens if your business fails?
Sell the mortgaged property to pay off the loan
This is suitable only if you won't need to live in the property - for example, if it is a buy-to-let property or a second home, or you are buying something smaller or cheaper.
What you could use to pay off an interest-only mortgage?
- Endowment mortgage
- ISA (Individual Savings Account)
- Pension Mortgage
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