MORTGAGE GUIDANCE
Interest-only mortgages: what you need to know
With an interest-only mortgage, monthly mortgage payments generally cover the interest charged rather than reducing the capital borrowed. A credible way of repaying the capital at the end of the mortgage term is important.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
How does an interest-only mortgage work?
The basic difference is how the monthly payments are used.
Repayment mortgage
Monthly payments generally include both interest and capital, so the mortgage balance should reduce over the term if payments are maintained as required.
Interest-only mortgage
Monthly payments generally cover interest, while the capital balance remains to be repaid separately.
At the end of an interest-only mortgage term, the outstanding capital still needs to be repaid.
How will I repay the mortgage?
This is known as a repayment strategy. Lenders may require evidence of an acceptable and credible strategy for repaying the capital, and acceptable strategies vary between lenders.
Investments, pensions or other assets
Sale of another property or the mortgaged property
Other clearly identifiable resources
Relying on investments or asset values involves uncertainty because their future value may differ from expectations. No particular strategy will be accepted by every lender.
Who might consider an interest-only mortgage?
Interest-only borrowing can arise in different circumstances, including some residential mortgages and buy-to-let borrowing. Lender eligibility, affordability and repayment-strategy requirements apply.
How is affordability assessed?
Lower monthly payments than an equivalent repayment mortgage do not necessarily mean a borrower can obtain a larger mortgage. Lenders apply their own affordability and eligibility criteria and can consider income, expenditure, commitments, term, loan-to-value and the repayment strategy.
Features that may be relevant
Monthly payments generally do not include capital repayment. This can produce different cash-flow characteristics from a repayment mortgage, and interest-only arrangements can be used in some residential and buy-to-let circumstances.
Important considerations
The capital remains outstanding, a repayment strategy is required, and investment or asset values may not perform as expected. Eligibility can be more restricted, and failure to repay the capital when required could put the property at risk.
Can I switch from interest-only to repayment?
Changing repayment method may sometimes be possible but depends on the existing mortgage, lender and circumstances. Moving to repayment will normally change the monthly payment because capital is then being repaid as well as interest.
What if my interest-only mortgage is approaching the end of its term?
Borrowers approaching maturity should establish the outstanding balance, mortgage end date, intended repayment strategy, whether that strategy is currently sufficient, and what options may be available if there is a shortfall. Options depend on circumstances and lender criteria and should be considered before maturity where possible. Refinancing will not necessarily be available.
Interest-only and buy-to-let mortgages
Interest-only mortgages are commonly encountered in buy-to-let, but availability and assessment depend on lender criteria and the circumstances.
What information might I need?
Requirements vary between lenders and circumstances, but you may be asked for:
Identification and address evidence
Income and financial information
Existing mortgage and property information
Proposed repayment strategy and relevant asset evidence
Can a mortgage adviser help with an interest-only mortgage?
An adviser can help you understand relevant mortgage options and lender requirements within the scope of their service, including how lenders may assess a proposed repayment strategy. Advice does not guarantee acceptance or that a particular repayment strategy will be accepted.
Frequently asked questions
What is an interest-only mortgage?
What happens at the end of an interest-only mortgage?
How do I repay an interest-only mortgage?
Can I change an interest-only mortgage to repayment?
Can I remortgage an interest-only mortgage?
Are interest-only mortgages available for residential properties?
Are buy-to-let mortgages interest-only?
Considering an interest-only mortgage?
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Your home may be repossessed if you do not keep up repayments on your mortgage.
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