If you’re looking to decrease your monthly mortgage repayments, an interest-only mortgage may be worth considering and while there are a few ways you can pay off an interest-only mortgage, you need to ensure you’re doing what’s best for your individual needs and circumstances.
What is an interest-only mortgage?
Having an interest-only mortgage means you’re only paying the interest that’s accumulating on your loan. You’d pay this every month and it could be significantly lower than other mortgage payments, as you’re not aiming to pay off the loan on top of the interest generated.
While this may sound appealing, there is a catch. When your mortgage term ends, you will still need to pay the full amount you initially borrowed. At this point, you’ll need to repay the entire loan as a lump sum.
How can you pay off an interest-only mortgage?
There are a few ways you can pay off an interest-only mortgage and it’s important that you have a plan in place to repay the total outstanding balance. Most people will use savings, investments, or other assets to pay off the total amount borrowed. You can sell your house to pay the outstanding, but this would leave you without a property to live in, so you’d need to have a plan in place.
However, if you can’t sell the property for as much, you could be left with an outstanding amount and no way to pay it.
You could set aside savings each month to cover this if need be, or take advantage of an inheritance, if you don’t have assets you can use to pay for the principal amount.
The pros and cons of interest-only mortgages
We’ve already mentioned two of the major pros and cons, the first being lower monthly rates and the latter being the lump sum you’re required to pay back. While your monthly repayments on a traditional mortgage will cost more, you will fully own your property at the end of your mortgage term. This may be a better option to stick with if you can afford it, as there are benefits to owning your own home.
The pros of interest-only mortgages:
Interest-only mortgages could provide temporary financial relief, as it could help reduce immediate financial strain and give you time to get back on track. This is something the Mortgage Charter will support.
You could also explore alternative investment opportunities by putting your money into investment accounts, where you could potentially earn substantial returns. Interest-only mortgages also have short-term flexibility, so instead of tying up your funds in the property, you could allocate this money into alternative financial goals, such as pursuing higher education or starting a business.
The cons of interest-only mortgages:
The primary downside of interest-only mortgages is the risk associated with repaying the entire loan at the end of the term. If your repayment plan falls through, or underperforms in the case of investments, you could risk losing your property or facing further financial difficulties.
Limited equity growth is the second potential downside. While you may still gain equity over time as property values appreciate, an interest-only mortgage limits your ability to build equity quickly. If property values decrease or remain stagnant, you could end up with a higher loan balance than the value of your property, leading to negative equity. This can make it challenging to remortgage or sell the property in the future. Finally, interest-only mortgages have become less common and lenders are a bit stricter with the criteria and requirements needed to get them.
Lenders will typically ask you to provide a repayment strategy and will investigate your credit history, as well as any equity you may have, as this could be used to repay a portion of the property.
How do I get an interest-only mortgage?
We always recommend speaking with a mortgage adviser if you’re considering moving to an interest-only mortgage. It can have its advantages, but you want to ensure it’s going to suit your individual needs and circumstances.
Get in touch with us today and let’s discuss your situation and homeownership goals.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
Related Articles
Getting ready to remortgage
How much does remortgaging cost?
