What is an Interest Only Mortgage?
This type of mortgage allows the borrower to pay back any interest on the amount they have borrowed, however the capital (actual amount borrowed) remains outstanding. This means that although the interest only monthly payments are lower than their counterpart repayment mortgages, you will need to ensure you source another way of paying off the capital at the end of the agreed mortgage term.
These mortgages are ideal for buy to let investors, or residential property owners who like to take risks and would prefer to invest their money in Stocks and Shares, ISAs, Endowment Policies, Investment Bonds or the like. They can also be used to help individuals that have been hard hit by the current economic downturn, and need to save a little extra each month from their outgoings.
Due to the recent recession, mortgage market crisis and subsequent liquidity restrictions between banks, the majority of lenders no longer offer residential interest only mortgages any more. Those that still do now impose either very restrictive qualifying criteria or reduced loan to values.
Interest only mortgages have always been seen as a high risk strategy. This is because if you are unable to repay the loan at the end of the term for one reason or another, you would have to sell your home to repay the debt, this could mean you have to downsize to a smaller property if you have enough equity after the sale, or in a worst case scenario, you could potentially become homeless.
You should also be aware there is a greater chance of negative equity by selecting an interest only mortgage.
Why use a Broker for Interest Only Mortgages?
There are a number of advantages and disadvantages to this type of mortgage:
- Monthly payments are cheaper for interest only mortgages meaning you are less likely to fall in arrears to the lender
- If you take out an interest only mortgage, you can switch to a repayment mortgage when your financial situation allows for it
- If the interest only mortgage is for a buy to let property, there may be tax relief benefits
- Any additional money that you pay off each month, over and above your monthly payment, is put straight towards paying off the capital
- If property value increases to higher than the original loan amount, you will get a tax-free lump sum if you sell the property
- These can be used for short term relief from paying a repayment mortgage, to help through difficult financial times.
- You do not pay back any capital on an interest only mortgage, so the mortgage debt will never reduce over the mortgage term
- If your property value depreciates, you could end up in negative equity if you originally took out a high loan to value mortgage
- The original amount you borrowed will still need to be paid back
- Most lenders now ask for proof that you have a repayment vehicle in place to pay off the full loan amount
- It is becoming increasingly difficult to attain this type of mortgage on a residential property and the deposit required will need to be much larger at the outset
- If your investments do not provide you with sufficient windfall, you will need to find the difference from somewhere else to pay off your debt
- You won’t own your property at the end of the mortgage term, until you pay off the full capital owed
For the aforementioned reasons, it is therefore essential to speak to someone who can advise you on the most appropriate solution to suit your individual needs. Our mortgage brokers at JF Financial Associates are on hand to do just that! With years of experience behind them, there is no one in a better position to provide you with the right advice, allowing you to make an informed decision.
If you want to know more about Interest Only Mortgages, drop us a line on 0345 508 8588. You have nothing to lose and everything to gain.
JF Financial Associates will never sell you something you don’t want. We offer honest advice on what you need.
The Financial Conduct Authority do not regulate buy to let mortgages.
PLEASE NOTE – Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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"Very helpful throughout the remortgage process and very good at explaining everything in simplified terms we could relate to and not just financial jargon."
Thank you very much for all your hard work obtaining our first mortgage, which was so difficult to get providing our limited finances! Your assistance has been invaluable, and we would have never achieved this without you! We would have no hesitation in using your services again or, indeed, in recommending you to anyone who requires services of a mortgage & insurance specialist.
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Justin was recommend by my bother who had his mortgage arranged with him a couple of years before. The set up process was very easy, Justin got me on the phone, found out my needs and financial details and then came back a couple of days later with three options for me to pick from. After than things went smoothly, Justin and his team were VERY helpful, they even helped fix a couple of problems caused by my solicitors. On the day of completion Justin was on the phone making sure everything was fine as were his team. I felt very well looked after and even decided to arrange extra life cover with Justin.
We have been a client of JF Financial for almost 9 years. Justin goes above and beyond to ensure everything runs smoothly. The service this company provides is 5 star. Would 100% recommend JF Financial.
Knowing Justin is a blessing, I had couple of re mortgage with JFinancial. Very friendly & stress free service, Justin always look after all small details before the application. Hassel free , as long you have all uptodate documents. Great service. Just talking to him is a great pleasure.
I would like to thank Justin from J F Financial for his extremely professional service. After my recent stage one interview which was to understand all aspects of my financial position he was able to tell me more about my finances than I knew myself. Justin gave me clear, decisive advice which enabled me to put things in place to secure future financial stability. I initially went to Justin to see if he was able to help secure an acceptable rate on the re-mortgage of my property as it had come to the end of its term and slipped into variable rate. This was something that I did not think was possible in today’s current financial market. Justin not only matched my existing interest rate but secured this rate for the next 5 years. From Stage one to completion of the mortgage I found this to be a very smoothly run and professional service and would not hesitate with recommending Justin from J F Financial to any of my family or contacts in the future.
Just thought would drop you a quick line to say thank you for all your help with helping us along the process of buying our flat. We are all settled in now and loving it!! I will highly recommend you to all my friends, as it was a pleasure dealing with you and you made the whole process a lot less stressful. Once again many thanks for all your help and your useful knowledge.
Thank you very much for your help, it’s a pleasure dealing with you and will definitely recommend you to my family and friends. Easy remortgage with no hassle!!! Thanks again.
This was a big help in meeting all my needs, very helpful and professional
5 star service. Could not recommend JF Financial highly enough. Justin assisted us throughout the whole house buying/selling process. He made one of the most stressful processes in life easy and hassle free. Was always available for any advice, even out of office hours! Would never look elsewhere for any financial advice in the future.
We have just completed on our 2nd mortgage arranged by Justin. We wouldn’t consider going to anyone else as JF Financial Associates are friendly, professional and determined to find the best mortgage for our ever evolving needs. Justin is able to explain the whole process in an understandable way, making sure you are fully aware the next stage of the process. I have no hesitation in recommending their services. Mr & Mrs Wallis. West Sussex.