Interest-Only Mortgage Payments

Interest-only mortgage payments allow you to pay purely the interest on a monthly basis for the term of the loan, with no payments of the original capital borrowed. The payments for this type of mortgage payment will be less than a repayment mortgage, however, at the end of the term, you will still owe the lender the original amount which was borrowed.

Although an interest-only mortgage can make a mortgage more affordable, it is important to remember that in 25 years’ time you will still owe the lender a large lump sum. With interest-only mortgage payments, your debt will remain the same size throughout the mortgage term. This is different to a repayment mortgage as you will pay back both interest and capital monthly.
You should also be aware that considerably more overall interest will be payable over the mortgage term (compared to a capital and repayment mortgage).

Interest Mortgages

Due to previous financial crisis’s, the number of lenders offering interest mortgages has decreased significantly, however, more lenders have started to return to interest-only lending.

Even though many lenders have returned to this type of mortgage repayment method, the lending criteria is now stricter on loan to value ratios and the salary requirements. If you are looking for advice on the best lender and deal for your mortgage, our whole-of-market mortgage advisors can provide you with the guidance you require.

As interest-only mortgage payments often require borrowers to save or invest in order to be able to pay off the full amount of their mortgage at the end, they are seen as a risky option. Interest-only deals are only advisable for those that have a lot of equity and are able to commit to a repayment plan to pay the capital lump sum at the end of the term, or have other assets that could be used for the eventual repayment of the debt e.g. second properties, shares or other investments, the ability to make large overpayments etc.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up the repayments on your mortgage.

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FAQs

How Do I calculate interest only payments?

Take your loan amount and multiply it by the annual interest rate (this will differ for each mortgage). Divide the result by the number of payments you will make over the year, and this is your monthly payment.

How do interest-only mortgage payments work?

Your monthly payments are made up of the interest alone, on the amount you borrow. At the end of the mortgage term you will still owe the amount you borrowed, having just paid interest over the term.

What is the benefit of repaying your mortgage interest only?

The main benefit is that your monthly payments will be lower than with a capital repayment mortgage. You can choose to set aside additional funds in a savings account, or an investment scheme (usual risks apply), which you can use to pay off the amount you borrowed at the end of the mortgage term. 

You will pay more interest over the term on an interest only mortgage (compared to capital repayment) due to the fact the debt is not reducing monthly.

Can I pay interest only on my mortgage?

If you do not already have an interest only mortgage you will have to apply to your lender (or an alternative) to secure an interest only mortgage. This way you will only be paying interest on your loan every month. You will still have to repay the amount borrowed, at the end of the mortgage term. 

Interest only is not suitable for most people and lenders have tight criteria so they are only made available to those where they believe it is a credible option. Call us and we can discuss this more.