A mortgage is a fixed term loan secured on a property. The loan is intended to be repaid in full by the end of the fixed term. Under a capital and interest, or repayment mortgage arrangement a little capital is repaid each month during the term of the loan. In this way the full capital amount is settled before the term ends.
Interest only mortgage – how it works
Under an interest only arrangement the borrower services the interest only during the term of the mortgage and the full capital balance is still outstanding at the end of the mortgage term. At this point the borrower will need to repay the capital from their own funds or by selling the property.
Borrowers use various methods to generate cash to repay the mortgage capital at the end of the term. These include investment products such as ISA’s and pensions, bonus payments, expected inheritances and sale of other property.
Interest only mortgage – advantages
The advantage of an interest only mortgage to the borrower is the reduced monthly payment. The size of that reduction depends on the prevailing interest rate and mortgage term. As a rough guide the interest only payment can be between seventy and forty per cent of the equivalent capital and interest payment.
For the client seeking an interest only mortgage it is important to understand lenders attitude to these arrangements. Lenders will not allow interest only arrangements where equity or deposit is under twenty five per cent. When an interest only arrangement is requested the lender will ask how the capital is intended to be repaid at the end of the term. Each lender has its own view of which methods of capital repayment are acceptable.
Interest only mortgages are standard arrangements for buy to let mortgages and sale of property is usually the capital repayment method. Therefore lenders do not ask for a repayment vehicle to be in place.
Interest only mortgage – risk
The major risk with interest only mortgages is that the total amount of mortgage interest paid is likely to be higher. This is because the borrower has the full capital amount outstanding for the term of the loan.
If you would prefer an interest only mortgage arrangement the simplest way to arrange this is via an independent mortgage broker. You broker will understand each lenders criteria and be able to advise you accordingly.
Our team are waiting to assist you – contact us now.
