With the housing market finally starting to reach decline, first-time buyers are free to start looking for their new home. However, buyers must be careful about the way that they approach purchasing the house and have an idea of what mortgage they wish to go for. There are different types of mortgages you can get, such as; an interest-only mortgage and a repayment mortgage. An interest-only mortgage is what we will be focussing on today. So, what is it? An interest-only mortgage allows you to pay just the interest charged each month on the loan, rather than paying the amount you’ve borrowed. You will pay the latter at the end of the term. Read on to find out why you should go for this type of mortgage. 

History 

Interest-only mortgages first started to become popular amongst first-time buyers after the financial crisis in 2008 that left money struggling for years to come. Customers were able to use this style of mortgage to their advantage and keep on top of their finances to gain the home of their dreams. Interest-only mortgages are now more sought after, meaning that they are more difficult to obtain as mortgage lenders normally only want people that can prove that they will pay what they owe at the end of the term. 

Differences 

Unlike an interest-only mortgage, repayment mortgages mean that you have to pay back some of the loan that you acquired, plus the interest on top of that. If you stick to this plan, you are guaranteed to have paid off all of the loans by the end of the term. 

Payments compared 

The obvious advantage of having an interest-only mortgage is that your monthly payments will be much lower compared to that of a repayment mortgage. 

For example: If you take out a mortgage worth £200,000 on an interest-only rate, over 25 years, at an interest rate of 3%.

• If you repay the mortgage at an interest-only rate you’d pay £500 a month.
• If you repay the mortgage at a repayment rate you’d pay £948 a month.

However, the downside to this is that after 25 years of continuously paying this fee, you would still owe the lender £200,000. Whereas, an individual that acquired a repayment mortgage would be debt-free, in terms of mortgage payments. 

Repayment plans 

A mortgage lender will always be cautious when granting someone with an interest-only mortgage, they will carry our checks to see if you have an approved repayment plan already in place. Repayment plans that they will accept can range but may include ISAs and stock market investments. The lender will almost certainly ensure that they are providing check-ups to ensure that you are on track to make your payments and nothing looks uncertain within your plan. 

FAQs

Can I switch from an interest-only mortgage to a repayment mortgage? Yes. You can change your mortgage by remortgaging or product transfer, however, it’s important to note that this will mean your monthly bill will increase. Always go to a mortgage advisor if this is something that you are considering. 

Can I extend my interest-only mortgage? This is something that is possible, but most mortgage advisors would not recommend it, ensure that you speak to a professional straight away. 

Can I have a part interest-only mortgage, and part repayment mortgage? If you see yourself fortunate enough to be in a better financial state and decide that you want to try and get rid of some of the mortgage debt that you owe. Then yes, it is possible to go with a hybrid approach with both types of mortgages. However, you will still need the means to pay off the interests-only side of the mortgage within the term. 

Is an interest-only mortgage best for buy-to-let? 

A lot of landlords prefer interest-only mortgages as this maintains their overheads and keeps them at bay. The mortgage can be repaid eventually by selling the property for profit, hopefully. 

Conclusion 

Interest-only mortgages are definitely exciting and could give the chance for an individual who may be currently struggling with their income to purchase their new home. However, they can be quite difficult to obtain. If you wish to learn more about interest-only mortgages, then why not contact GPD Mortgage Solutions today and let us help you.