Getting a mortgage is a significant step and it should be an exciting experience. Now that the time has come to either buy your first home or move to another property and change your mortgage, you might be left wondering what your options are. Whilst there are many different mortgage products out there to choose from, they tend to fall into two categories as there are two ways to repay your mortgage.
These methods are repayment and interest-only. Before looking at what these types of mortgages are, it’s important to note that a mortgage is made up of two different parts – there’s the capital, which is the sum that you borrow from the lender and the interest, which is a charge that the lender applies for allowing you to borrow the capital.
With a repayment mortgage, you’ll make monthly repayments to pay back a small amount of the loan and some of the interest. Once you have made all of your payments at the end of the term, you will have paid off your mortgage. As for an interest-only mortgage, you make monthly payments to repay the interest. At the end of the mortgage term, you will still owe the capital, which is the amount of money that the lender has allowed you to borrow.
We know that deciding on the right mortgage deal might feel like a daunting prospect. Here at Avail Mortgages, we have a team of mortgage brokers that are equipped with the skills, knowledge and mortgage products to help you find a suitable option. We’ve got decades of combined experience and access to a range of bespoke policies that our customers can choose from.
Our brokers all work to uphold and exercise the principles that are outlined by the Financial Conduct Authority (FCA) in their ‘Treating Customers Fairly’ (TCF) initiative. When you choose to work with us for advice regarding an interest-only mortgage, you know that you’re going to receive an outstanding service, in line with the FCA. We know that every client has different needs and a unique set of personal circumstances. That’s why we put your needs first, helping you to feel supported and informed about your choices and the products that are available to you.
Whether you’re looking for an interest-only mortgage or you’re interested in another mortgage product, we’re committed to making the process of finding the most suitable product stress-free and straightforward. We offer our services across the North in places such as Sheffield, Huddersfield and Leeds, as well as further afield across the UK. If you’d like to discuss your options with one of our mortgage brokers, get in touch online today or call 01484 556 245.
What Is An Interest-Only Mortgage?
As mentioned earlier, an interest-only mortgage allows customers to make monthly repayments, to repay the interest that they have been charged. This means that they don’t repay the capital until the end of the term. Unlike a repayment mortgage where you repay the interest and the capital each month until the end of the term, the size of your debt remains the same with an interest-only mortgage, throughout the duration of your term.
Interest-only mortgages are a niche product nowadays. After the 2008 financial crisis, many lenders stopped offering the products as they soon realised that many people that were lending on an interest-only basis would struggle to repay the capital, after their interest repayments had been made. Prior to this, customers could get an interest-only mortgage without having to meet a set strict of criteria. Lenders soon realised that this was problematic.
Now, when customers want to take the route of interest-only lending, they have to provide evidence regarding how they plan to repay the debt at the end of the term. This is called a repayment vehicle – these repayment solutions must be approved by the lender as part of the strict lending criteria. The number of lenders that are offering these types of mortgages are somewhat increasing, but with strict lending criteria on salary requirements and loan-to-value ratios.
Because these products can be hard to find and gain approval for, having a mortgage broker to guide you through the process and provide financial advice can be extremely worthwhile. Here at Avail Mortgages, our specialists have access to a range of bespoke policies and exclusive products, and we can help our clients to find niche products that might be a suitable solution for them.
Whilst it can be difficult to obtain an interest-only mortgage, your individual circumstances might make you eligible. For example, if you are a landlord with a property investment, finding an interest-only mortgage in the form of a buy-to-let mortgage may be possible. Many landlords repay their mortgages on an interest-only basis. However, regardless of your circumstances, if you cannot repay the capital at the end of your mortgage term you will need to find a way to pay off your debt. For instance, you might sell the property or take out a new mortgage.
If you’re nearing retirement, you may find it easier to obtain an interest-only mortgage too. Some lenders now offer interest-only mortgages designed for people that are getting ready to retire – these are called RIO mortgages. They might be a suitable option if you are coming to the end of an existing interest-only mortgage and you cannot repay the capital. They might also be useful to those that are looking to release some cash from their home but would like to avoid equity release products.
Why Choose An Interest-Only Mortgage?
As with any mortgage product, an interest-only mortgage has risks and benefits. As with a standard mortgage, you should always ensure that you can afford to take out an interest-only mortgage – affordability is a vital part of deciding whether a mortgage product is right for you. If you have any doubts about making the monthly repayments or paying off the capital at the end of the mortgage term, then you should consider alternative mortgage products and discuss this further with a mortgage adviser.
If you are seriously considering an interest-only mortgage and can afford to obtain this type of product, then there are benefits that come with this type of mortgage:
- The main benefit is that an interest-only mortgage requires lower monthly payments than a standard mortgage because you only have to pay back the interest during the term.
- It also offers a greater level of flexibility, as you can decide where your money will go and how you will pay off the capital once your mortgage term has ended.
- If your property performs well – for example, if you have an interest-only buy-to-let mortgage and generate income from high rental yields – you could even make a profit. This profit could be used to pay off the mortgage quicker than originally planned or it could be spent on something else that’s needed.
- If you get an interest-only mortgage, you can still switch to a repayment mortgage in the future, if you need to. Just keep in mind that this will require some adjustments to fees and monthly repayments.
How To Get An Interest-Only Mortgage
Whilst many lenders are offering interest-only mortgages again, the affordability criteria for these mortgages have become increasingly strict. Whilst this criterion will differ depending on the lender, there are some things that you can do to improve your chances of getting approved for this type of mortgage.
According to Which?, lenders are more likely to grant approval for this mortgage product if you save up enough money to only borrow a 50% loan-to-value ratio. As well as this, they advise holding a minimum of £200,000 equity in your property if your repayment vehicle is the sale of the home. They also recommend having a stable, high annual salary of over £50,000.
It’s important to remember that each lender will have different criteria – our mortgage brokers can help you to assess this criterion, to decide which lender and mortgage product may be suitable for you. Whilst it will vary depending on your lender, all lenders will want you to have a repayment plan in place to prove that you can repay the capital at the end of the mortgage term. You will need to evidence this during the application process.
How to pay off an interest-only mortgage
There are several ways to pay off your mortgage. These repayment methods include:
- Endowment policies – this is an investment product, from a life assurance company, which is a regular savings plan. This pays out a lump sum of money at the end of the term.
- Investment plans and investment funds including life insurance policies in which a lump sum may be invested in various available funds, a pension fund, stock and shares, a unit trust, open-ended investment companies (OEICs), investment bonds or a high-interest savings account.
- The sale of a second property. Lenders will probably ask for confirmation of ownership, property details and evidence that shows the amount of any mortgage debt.
You should keep in mind that lenders will regularly check that your repayment plan still stands once you have accepted the mortgage. For example, if you are relying on your savings, it’s not wise to spend these once your mortgage has been approved. Lenders will regularly check that your repayment plan is on track.
What happens if you cannot repay the loan?
If your funds do not cover the cost of your repayments, there are several things you could do:
- Discuss a term extension with the lender, which will give you longer to make repayments.
- If you’re a landlord with a property investment portfolio, you may wish to consider using the equity in your other properties to pay off the capital.
- Use some of your pension to repay the capital, but keep in mind that this will have an effect on your income after you retire.
- Consider remortgaging to find a more suitable repayment mortgage.
- You could sell your property as a last resort.
Why Choose Avail Mortgages?
Since we started offering our services in 2018, we’ve been committed to offering an enjoyable experience, thanks to our tailored services, that help our customers find the right interest-only mortgage for them. We put honesty, transparency and impartiality at the heart of what we do, to provide reliable information and advice that you can trust. Whatever type of mortgage or insurance policy you’re interested in, we can help you to find possible solutions thanks to our network of trusted providers and range of bespoke policies.
We’ll be there whenever you need us. We know that life can get very busy, so that’s why we’ll work flexibly around your needs, speaking to you at times that are convenient to you.
To offer a quality service and a streamlined, easy process, we use technology at Avail Mortgages to make things easier for our customers. With access to our online portal, you can view all of your important documents and information whenever you like, from wherever you are. This also means that you won’t need to make countless trips to our office – all of your important documentation is available to you remotely.
We’ve got over 35 years of combined experience here at Avail Mortgages, so we know exactly how to deliver an exceptional service that our customers appreciate. We’ll provide you with a service that’s easy to understand, free from jargon and any long-winded processes. We stick to the main goal of finding mortgage products that may be suitable for you.
Get In Touch
If you’re interested in finding an interest-only mortgage and need impartial support and advice that you can trust, our experienced team of brokers are waiting to help you. For more information about our services or to book an appointment with one of our brokers, contact us today and call 01484 556 245 or email [email protected].