An interest-only mortgage is a type of mortgage where you make monthly payments that only repay interest, not the loan itself. This will mean that you’ll pay less each month but will have to pay off the loan in full at the end of the mortgage term or sooner. If you want to learn more about this, read on as we break down everything you need to know about interest-only mortgages.
What Is an Interest-Only Mortgage?
If you take out an interest-only mortgage, you will still have to pay monthly payments to your lender. However, these payments will be smaller than they would be on a repayment mortgage. The difference will be paid off the interest that accrues on your loan each month. So when your interest-only mortgage term ends, you will still owe the same amount of money to your lender as you did originally – unless you pay off more of the loan in order to reduce this balance. When this happens, you can choose whether to move onto a new mortgage or keep the same one.
How Do You Work Out Interest?
When you have a mortgage with interest-only repayments, you pay only the interest each month. Looking at an example of this type of mortgage, if you borrow £200,000 on a 3 per cent mortgage, you would pay £6,000 in interest each year. So, your monthly payment would be £6,000 per year divided by 12 months, which is £500. Over 20 years this will mean that you pay £119,900 in monthly payments. If you have a regular repayment mortgage, you will also pay off some of the principal loans with each payment. The same loan as a repayment mortgage would cost you £1,100 per month, and at the end of 20 years, you would have repaid £266,170.
How Does Repayment Work?
When your interest-only mortgage term ends, you will get a bill for the remaining principal balance. You need to have a plan in place for how you will pay for the principal. Now, there are several ways you can go about doing this depending on your specific financial situation.
You can repay an interest-only mortgage by taking out another mortgage (which could be interest-only or repayment). You’ll need to make sure you still meet a lender’s criteria, including being older and having changed your circumstances.
If you run into trouble, you can sell a property that is used to repay an interest-only mortgage. More commonly, investors who buy to let use this strategy. If you are lucky, you will get enough of a profit to cover the cost of the loan without going over. However, if you are unlucky and run into negative equity, you will have to pony up the difference between the loan amount and the selling price.
Lastly, you can opt to pay for it yourself. This is the most straightforward way to repay your interest-only mortgage- If you have enough money saved up in other funds, you can use those to pay off an interest-only loan.
Conclusion
We hope this article proves to be useful when it comes to furthering your understanding of interest-only mortgages. As you can see, interest-only mortgages can be quite useful in the right situation. Be sure to keep everything you’ve learned here in mind so that you can make the best decisions for your finances.
If you’re looking for a mortgage that’s just right for your needs and your financial capabilities, A Move Brokers is here to help. We are a team of qualified professional mortgage advisers in Chester that will help you get the best possible deal on your real estate journey. Contact us today to book a free initial consultation!
As a mortgage is secured against property, it could be repossessed if you do not keep up the mortgage repayments.