Mortgage types in detail

Interest only mortgages

Interest only mortgages

Apart from the famous Buy to Let mortgage, which lets you become a landlord, interest-only mortgages are uncommon. With an interest-only mortgage you’ll only pay the interest on the amount loaned to you without paying off the mortgage (i.e. the amount you bought the house for) itself. ccc

So what happens when the mortgage term ends?

At the end of the agreed mortgage term, the lender will expect you to pay back the full cost of the property when you bought it – a pretty huge sum!

If you didn’t have all that money to hand you would have to sell the property to repay the mortgage, or take out a new mortgage instead.

Why is it so hard to get an interest-only mortgage?

It wasn’t always this tricky. Before the financial crisis in 2008 interest-only mortgages were far more common. They were popular because mortgage interest payments by themselves tend to be far lower than if you’re also paying off the cost of the property.

It later emerged that many people who had taken out interest-only mortgages were struggling to repay the mortgage at the end of their term. That’s because lenders hadn’t been running checks to ensure borrowers could afford it, leading to the current, far stricter rules.

Who can get an interest-only mortgage now?

Apart from Buy to Let mortgages, it’s very hard to get an interest-only deal, and many lenders don’t offer them at all. Those that do usually require:

  • A large deposit or value of equity if remortgaging
  • Assurance that you’ll be able to pay the full amount of the mortgage at the end of the term (e.g. through ISA savings), which they’ll ask to see regularly.

Some lenders allow borrowers to overpay on their interest-only mortgage, which could help chip away at the capital before the term comes to an end.

If you want to buy a home but you don’t think you can afford a ‘normal’ mortgage, the Help to Buy: Shared Ownership scheme might be a better idea.

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