With interest rates increasing across the market, it’s becoming more evident that people want to reduce their monthly payments as much as possible. One way that your mortgage payments can be reduced is by putting your mortgage, or at least a part of it, on an interest only basis.
What is an Interest Only mortgage?
An interest only mortgage is a type of mortgage that only requires you to pay the interest on your mortgage each month. What this means is that your mortgage balance will not reduce throughout the term of the mortgage, essentially leaving the full mortgage balance (or at least the interest only part) outstanding at the end of the mortgage term.
Interest only mortgages can be more difficult to get on a residential basis and they are far riskier than a standard capital and repayment mortgage which are explained later in this article.
What are the benefits of having an Interest Only mortgage?
The main benefit is that your mortgage payments will be less, as you’re only paying the interest element of your mortgage and not the capital. This will free up some disposable income on a monthly basis, which is something a lot of people are looking for at a time when their outgoings are increasing.
Why is it harder to get an Interest Only mortgage?
Generally, lenders do make securing interest only mortgages harder to get in comparison to capital and repayment. The reason being, Interest Only lending is deemed higher risk meaning extra checks and criteria points are put in place to protect all parties. Interest only lending tends to be only for lower loan to value mortgages with the majority of lenders allowing it up to a maximum of 50-75% LTV.
The other reason you may find it difficult to obtain an interest only mortgage is that lenders will require what’s known as a repayment vehicle / strategy. This is confirmation on how you’re intending to repay the full mortgage balance if it’s still outstanding at the end of the mortgage term. Most lenders will allow various repayment vehicles, most commonly, we see sale of the mortgaged property and downsizing being the plan on how the mortgage is to be repaid. This means the property will need to be sold at the end of the mortgage term and the mortgage redeemed.
Other repayment vehicles include pensions, sale of a property in the background or savings.
Why is Interest Only lending riskier?
Interest only lending is riskier, mainly because, unless you’ve made overpayments on your mortgage, the full mortgage balance will remain outstanding. Interest only mortgages were widely available in previous years, however since the 2008 financial crash, the availability of interest only lending for residential mortgages has reduced and additional hurdles have been put in place to ensure both you and the lender are protected.
Having an interest only mortgage with no repayment vehicle is incredibly risky and will leave the lender needing the full mortgage funds back, if you are unable to repay the mortgage yourself then the last resort could be to sell the property, which is not ideal if you were not planning this. As responsible advisers, we will ensure we discuss the pros and cons of this type of lending and will make it very clear on the risks involved.
Is interest-only the best option for me?
As with any mortgage product, it’s very much dependent upon your specific needs and circumstances. We will establish whether this is an option for you throughout our advice process.
Contact us today to find out more.
29 Jul 2022
22 Aug 2023