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Interest-Only Mortgages

With interest-only mortgages you only pay the accrued interest without reducing the balance of your mortgage loan. This is way you will have lower monthly payments, but is this type of mortgage suitable for you? 






WHAT IS AN INTEREST-ONLY MORTGAGE?

As the name suggests, with this type of mortgage you will only pay the interest on the amount borrowed. At the end of the loan period you owe exactly what you initially borrowed, and you will have to be able to repay this amount entirely.  

It is also possible to split a mortgage into interest-only and repayment with the so-called Part-and-Part mortgages. This means that you will repay part of the mortgage balance as repayment and the other part as interest-only. This way you have the benefit of lower monthly payments while still reducing your debt at the end of the term, However, bear in mind that since you will have a significant debt to repay at the end of the term, the lending criteria is still strict and lenders will ask to see evidence of a repayment strategy for the interest-only portion of your mortgage. 


WHY GET AN INTEREST-ONLY MORTGAGE?

The main advantage of interest-only mortgages is lower monthly payments since you are only paying the interest due on the amount borrowed. And if you are concerned about having to pay the entire capital at the end of the mortgage term, you may be able to switch to a repayment mortgage later. 

The interest-only mortgages are often found in the buy-to-let market. With lower monthly mortgage payments some prefer to use the money they would have otherwise used to repay the mortgage to invest elsewhere instead. 


ARE THERE ANY DISADVANTAGES?

- Lenders find them risky so many have stopped offering them. It is best to speak to a mortgage advisor to see if you can qualify for this type of mortgage and if it is the best option for you. 

There is no certainty of being able to pay the entire debt when the mortgage term comes to an end. 


- They are more complicated to look after because your mortgage and the repayment means are separate.

 

 










HOW DO I APPLY FOR AN INTEREST-ONLY MORTGAGE?

Currently it is a lot more difficult to get an interest-only mortgage and strict criteria has to be met:

- A high minimum income is often required, along with a substantial deposit (at least 25%).  

- Evidence of how you plan to repay the loan at the end of the mortgage term. Most lenders will request to see more than just having a savings account. 

Interest-only mortgages are more often approved for those borrowers at the higher end of the affordability scale that have enough income to afford a repayment mortgage, but there are still lenders who will lend to lower incomes too. 

An interest-only mortgage is a higher risk than a repayment mortgage so Fairview Financial will look at your circumstances and advise a suitable option for you. We are also able to search across the market, having access to specialist lenders, to find you a competitive rate best on your affordability. 

For more information and guidance on interest-only mortgages contact our specialist team.

 

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