An interest-only mortgage is a loan in which the borrower pays only the interest on the loan each month. The borrower does not pay down the principal of the loan, which means that the loan balance remains the same over the term of the loan. At the end of the loan term, the borrower is expected to pay off the remaining balance in full. For example, if you borrowed £200,000 over 25 years, you will pay interest every month, but in 25 years’ time, you will still owe £200,000. At that point the mortgage lender will need to be paid – lenders accept a variety of ways to do this – selling the property or using savings are two examples.
The benefit to the borrower is that monthly payments are much lower than a repayment mortgage.
A repayment mortgage is a loan in which the borrower pays both the interest and the principal on the loan each month. This means that over time, the borrower will pay down the loan balance and eventually pay off the loan in full.
The main difference between the two types of mortgages is how the loan balance is paid off over time. With an interest-only mortgage, the loan balance remains the same, while with a repayment mortgage, the loan balance decreases over time.
The main risk of interest-only mortgages is that the borrower may not have enough money saved at the end of the loan term to pay off the remaining balance or be unable to sell their home for enough to pay off the mortgage.
It is also worth noting that interest-only mortgages tend to have higher interest rates than repayment mortgages.
It is also important to get mortgage advice when considering the suitability of interest-only loans, a mortgage broker can assist in helping you decide whether this is appropriate for you.
At The Mortgage Branch, we are here to help you secure the most suitable mortgage for you, whatever your situation.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT
