What is an interest only mortgage?
With an interest only mortgage, as the name suggests, you only pay back the interest on the loan each month. You don't pay back the money you borrowed to buy the property (the capital) until the end of the mortgage term.
This means that your monthly payments are much lower than if you had a repayment mortgage, but you’ll need to have the money to pay back the entire loan at the end.
Of course, this type of arrangement presents a bigger risk for yourself and the lender. Therefore lenders will only agree to provide you with an interest only mortgage if they're confident you'll have the ability to pay the full amount back at the end of the mortgage term. There are strict guidelines to ensure responsible interest-only lending.
Before taking out an interest only mortgage, therefore, lenders will want to understand how you intend to pay back the loan. This is known as the ‘repayment vehicle’.
The most common ways that people do this are:
- Cashing in on stocks, shares, ISAs, or savings
- Selling other properties you may own
- Through pensions, endowment policies, and investment bonds
If, by the end of the mortgage term, you don't have sufficient funds available to pay back the loan amount, you may find yourself having to sell the property to pay the mortgage off.