If so, an interest-only mortgage might be the right mortgage for you.
With interest-only mortgages, you only pay interest each month until the end of your mortgage term. Once your term is complete, you have to pay back your loan (the amount you borrowed from your lender). This is completely different than a capital repayment mortgage, wherein you pay back some of your loan along with interest each month so that your loan is entirely paid back by the end of your mortgage term.
Since interest-only is a riskier type of repayment, lenders may have strict criteria when lending interest-only plans. For example, they may require large deposits (up to 50% of your property value) to make sure they don’t lose their investment. Interest-only mortgage lenders may also require you to prove that you have a plan to pay back all your debt at the end of your mortgage term. Be sure to check your lender’s fees as there may be hidden costs involved with an interest-only mortgage loan.
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No. You can switch to a capital repayment mortgage whenever you want. In fact, interest-only mortgage loans may be better suited for the short term. Many buyers (particularly first-time buyers) are finding it difficult to afford their monthly repayments since house prices are so high and buyers are expected to put down a larger deposit these days (usually 10% - 20% of your property value). By starting off with an interest-only mortgage, you face lower monthly repayments that are easier to pay. Once you feel more financially secure (maybe from a salary raise), you can remortgage and get a capital repayment mortgage to start paying off your actual loan along with the interest.
The best interest-only mortgages offer the option to gradually switch to a capital repayment mortgage so that your monthly repayments don’t all of a sudden jump to a higher amount. You can take out a part-interest/part repayment plan for a year wherein you mostly pay interest, but also start paying off some of your loan per month.
The lower monthly repayments of interest-only mortgages also allow buyers more financial flexibility when moving into their new home. You may want to buy new furniture or spend money on interior design. These costs, along with all the fees you have to pay when you get your mortgage, can quickly add up. Therefore, you may be in need of the money you save each month with an interest-only mortgage. You may also want to look at cashback mortgages and discount mortgages for other options on how to access extra money during the initial stages of your mortgage term.
This depends on your situation. Many buy-to-let buyers opt for a buy-to-let interest-only mortgage since they usually intend to sell the property in the future. At the end of the mortgage term, buy-to-let borrowers use the money they earn from selling the house to pay off the loan amount. Under these conditions you have to hope your property value has increased so that it can generate enough money to pay off your capital debt. This is a risky option, so make sure you don’t put all your eggs in one basket – have some extra money saved and don’t rely on house prices rising. Also think about whether you really want to sell your house. If your property value rises and you sell your home to pay off your debt, you may find that other properties have also increased in price and you have to take out another large mortgage to buy another home.
You don’t have to sell your home in order to pay off your capital loan at the end of your mortgage term. You can plan ahead to make sure you can pay off your loan. This plan may include making monthly payments into an investment or savings plan (for example, an endowment, a bond, or an individual savings account). However, make sure you have the discipline to follow your plan if you decide to put money away each month. If you don’t stick to your plan, you may be forced to sell your home. Also consider whether your plan actually saves you money. You may find that your monthly investment/savings payment on top of your interest repayment costs the same amount as paying a higher monthly repayment with a capital repayment mortgage. Talk to a professional mortgage adviser who can discuss your payment plan with you and help you decide whether interest-only repayments are the best option for you and your financial situation.
Yes. An interest-only mortgage will most likely cost you a lot more money than capital repayment mortgages. You could feasibly spend over £50,000 more by making interest-only mortgage repayments. Since you don’t pay off any of your debt over the course of your mortgage, you are constantly paying interest on the entire loan (unlike a capital repayment mortgage where you pay less interest each month since you have less debt each month).
Therefore, you might want to seriously consider switching to a capital repayment mortgage after a few years. An interest-only mortgage is great to help you in the short term, but could cost you a lot more money if you keep it for your entire mortgage term.
If you want lower monthly repayments but don’t want to take out an interest-only mortgage, you could alternatively extend your mortgage term on a capital repayment mortgage. However, keep in mind that although this option lowers your monthly repayments, it will take longer to pay off your loan and cost you more in interest.
Just fill in this short form and a mortgage adviser will contact you to answer all of your questions, give you interest-only mortgage advice, and get you on your way to buying your home.
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