Interest-Only Mortgages

With an interest-only mortgage, you could make your monthly mortgage repayments more affordable by only paying back the interest, not the capital. For those looking to apply for an interest-only mortgage in the UK, it’s worth understanding how these arrangements work in more detail.
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What is an interest-only mortgage?

As the name suggests, a UK interest-only mortgage involves repaying just the interest on the amount you borrowed each month.

This is instead of repaying the interest as well as the original capital which is the standard arrangement for traditional repayment mortgages.

Interest-only mortgages are a popular option for landlords looking to purchase a buy-to-let property.
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How does an interest-only mortgage work?

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Things to consider

What are the benefits?

The most obvious benefit to opting for a UK interest-only mortgage is the fact that your monthly repayments will be far more affordable than a traditional residential mortgage arrangement. This is because you’ll only be paying back the interest each month.
Another advantage of having lower monthly mortgage payments is that you’ll benefit from more financial freedom and cash flow. This will allow you to manage other household expenses and financial investments with ease.
If you’re considering applying for a mortgage to secure an investment property (also referred to as a buy-to-let mortgage), then this will typically be an interest-only mortgage. However, a buy-to-let mortgage is only suitable for applicants that don’t plan on living in the property.

What are the risks?

At the end of the term, the original capital must be repaid in full in one lump sum. If you’re unsure how you’re going to cover this cost, it’s well worth having a reliable plan in place. Otherwise, you may be forced to sell the property to recover the lender’s money. Not to mention, if the sale of the property doesn’t generate enough money to repay the loan, then the cost may be recovered through the sale of other assets.
Typically, interest-only mortgage deals mean you’ll pay more interest overall than repayment arrangements. This is because these deals often come with higher interest rates than conventional loans and interest is charged on the full amount each month throughout the entire mortgage term.
With a UK interest-only mortgage, unless you make extra payments, you won’t be building any equity as the original loan amount doesn’t decrease. The only equity you’ll have in the property is the initial deposit you put down which can be between 25% and 50 per cent of the property’s value, depending on the lender.

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Frequently asked questions

When the term for your interest-only mortgage comes to an end, you will be expected to pay off remaining loan in full. Typically, the borrower will be able to afford this by selling the property. However, if the borrower wants to continue living in the property, then they will need to explore other avenues of driving equity as they will still need to repay the loan in full.
Banks and building societies still offer interest-only mortgages in the UK, through they are less common than in previous years. Lenders may also have a stricter criterion for assessing the eligibility and affordability of borrowers, making interest-only mortgages harder to obtain.
For lenders, one of the most important aspects of determining whether an applicant is a suitable borrower for an interest-only mortgage is whether they have a clear plan of capital repayment. This is known as a repayment vehicle and could involve an endowment policy, ISA, pension, property sale, or investment bond. Each lender will have their own range of acceptable repayment plans.
The typical term for an interest-only mortgage in the UK is between five and 25 years. However, you can remortgage at any time including at the end of the deal if you want to switch to a repayment mortgage or benefit from a lower interest rate.

HOW TO APPLY FOR Shared Ownership

01

Check your eligibility

First, check that you’re eligible to purchase a property using the Shared Ownership Scheme. You can do this by asking your mortgage advisor or by reading the relevant government guidance.

02

Find a property

Next, you’ll have to find a suitable shared ownership home that you like in your desired location. As with any property you’re interested in, you should view the home, make sure you’re eligible, and ensure you can afford the property.

03

Reserve the home

You’ll be asked to pay a reservation fee to the landlord of up to £500. This secures the property for a fixed period and the amount is deducted from the final amount you pay on completion day. If you do not buy the home, you won’t usually get the fee back (check with the landlord before you reserve).

04

Contact the professionals

A mortgage advisor will help you to secure the most appropriate mortgage for your current needs and circumstances from a selection of lenders and understand your mortgage offer, while a solicitor or conveyancer will handle the process of ownership transfer.

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UK Mortgage Centre is a trading style of Refresh Mortgage Network Limited. Refresh Mortgage Network Limited is authorised and regulated by the Financial Conduct Authority. FRN – 826982. Registered in England & Wales: 11614569. As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments. The Financial Conduct Authority does not regulate some forms of buy-to-let mortgages. The Financial Conduct Authority does not regulate will writing and taxation and trust advice.
You may be charged a fee, starting from £345, for our advice given. Your dedicated advisor will discuss this further on your free initial phone call.

The guidance and/or advice obtained within our website is subject to the UK Regulatory Regime and is therefore primarily targeted at customers in the UK

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