This is a question we get a lot and it’s probably best to, first of all, explain the differences between the two and a few of the advantages and disadvantages.
Most people would probably assume all mortgages are set up on a repayment basis so this blog may be a bit Interest Only focused. However, this may help explain which is best for you.
Interest-Only mortgages are exactly as they sound. Every month you are only paying the interest of the mortgage and you aren’t paying off any of the actual mortgage balance.
|The monthly payments will be lower as you are only paying interest.||Risk! This is a big one. You aren’t paying off the mortgage so in the future you need to make sure you have enough to clear the loan in full|
|You’d have more deposable income per month to invest or save.||More expensive overall. As you aren’t reducing the debt, the amount of interest you pay isn’t reducing either.|
|If you invest this additional disposable income, you may actually make a profit. This means you could clear the mortgage balance in the future and actually have a surplus to spend as you like.||Risk! That’s right, it’s so important I’m putting it in here twice. No one can guarantee that your investments will perform well enough to clear the mortgage. If you don’t have enough to clear your mortgage at the end of the term, your home may be repossessed to clear the debt.|
A £150,000 mortgage at 2.5% over 25 years would cost £312.50 per month.
Repayment mortgages, sometimes referred to as ‘Capital and Interest’ Mortgages are again, as they sound. Every month you are paying interest but also repaying some of the actual mortgage balance.
|Low risk. As you are paying back the balance as you go, as long as you keep up your payments the debt will be cleared at the end.||Higher monthly payments. As you are paying back capital and interest, your monthly payments are higher.|
|Less interest overall. As your balance will reduce every month, the balance you are paying interest on reduces every month. Meaningless interest.||See above, that’s the only disadvantage really. Otherwise it’s all good stuff which is why it’s the most common way to take a mortgage these days.|
|More options. This is the most common way of taking a mortgage and therefore you have more choice when picking lenders and rates.|
A £150,000 mortgage at 2.5% over 25 years would cost £673.00 per month.
A BRIEF HISTORY
Interest-only mortgages used to be very common in the 80s and 90s as interest rates were so high. It was also very easy to get a mortgage in relation to document checks and criteria. Most people would take their mortgage on an interest-only basis, set up an endowment or some linked investment alongside, and hope that the investment balance was higher than the mortgage balance at the end of the term so that they could make a nice profit after clearing the mortgage.
Unfortunately, this wasn’t always the case and the investment wasn’t enough to clear the loan. This then leads to a huge number of issues and in some cases, elderly people being forced to sell their homes in order to repay the debt to the mortgage lenders.
This and a number of other wider financial issues have meant that interest-only mortgages are very difficult to get now and are very uncommon because of this. Many lenders don’t even offer interest-only options and instead require you to take the mortgage on a repayment basis to reduce the risk to you, but also reduce their risk.
As there are a number of older borrowers that are coming to the end of their Interest Only periods and are finding themselves without enough to repay the debt a new type of mortgage has been born in recent years called a ‘Retirement Interest Only (RIO)’ Mortgage. Have a read of our blog here if you think this might be for you.
Can I get an Interest-Only mortgage?
To get an interest-only mortgage now lenders often require a number of things.
- A minimum income, typically £75k or above.
- A minimum amount of equity/deposit. Typically £150k.
- No more than 60% Loan to value.
- That it finishes before you are 70.
- That you have proof of how you plan to repay it.
If you need some advice on mortgages or if you think you may qualify and would like to discuss further, please give us a call on 0117 452 0330 or drop us an email at email@example.com.
Hopefully, you’re a bit more ‘in the know’ now about the two different types of mortgage. As you can probably gather, the market is heavily weighted towards repayment mortgages but interest-only does still exist and for the right person it could be of benefit.
If you have any questions about how to take your mortgage or just want to clarify any of the above points, please do give us a call. We love talking about mortgages and helping people make the right decisions.
Tel: 0117 452 0330
Or you can fill in the contact form on the ‘Contact Us page of our website.