What Are Interest Only Mortgages?

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What Are Interest Only Mortgages

What is an example of an interest-only mortgage?

Example of an interest-only mortgage – Say you obtain a 30-year interest-only loan for $330,000, with an initial rate of 5.1 percent and an interest-only term of seven years. During the interest-only period, you’d pay roughly $1,403 per month. After this initial phase, the payment would rise to $2,033 per month — assuming your rate doesn’t change.

Many interest-only loans convert to an adjustable rate, so if rates rise in the future, yours will, too (and vice versa). With a 30-year fixed-rate mortgage for the same amount, you’d pay $1,881 per month. This includes principal and interest, and also accounts for the higher rate on this type of loan, in this case 5.54 percent.

With both the interest-only and traditional fixed-rate options, you’d pay a total of about $679,000, with around $349,000 of those payments going toward interest. As you can see, however, you’d ultimately have a higher monthly payment with an interest-only loan.

What happens at the end of a interest-only mortgage?

When your mortgage term ends, you must pay off the whole balance outstanding on your account and any associated loans (if the associated loans have also came to an end). This requirement is part of the terms and conditions of your mortgage. This page will help you to understand our process, and what to do if your mortgage term is either coming to an end or has already ended.

  1. If you have an Interest Only mortgage, your monthly payments have been paying the interest but have not reduced your loan balance (unless you have been making overpayments to purposely reduce the balance of your mortgage).
  2. This means that at the end of your agreed mortgage term, you need to repay your loan in full.

Please click here for more information on Interest Only mortgages. You should already have a plan in place to pay off the loan when its term ends. If you haven’t already done so, please share your plan with us as soon as possible. You can either call us on 0330 159 2590* or fill in the repayment plan form and send this back to us.

  1. If you do not have a repayment plan in place to repay your loan in full, please call us on 0330 159 2590* as soon as possible to arrange a telephone appointment with a specialist adviser.
  2. They will discuss your options with you.
  3. Your home may be repossessed if you do not pay the full amount on the date we agreed.

You may also be taken to court to recover any additional shortfall if the sale price of your property does not cover the loan. Our Process To help ensure you can repay your mortgage balance, we will:

Write to you 12 months before the end of your term to remind you that your mortgage is coming to an end; We will then send you a further reminder six months before your term ends; Finally, we will then write to you a final time one month before the end of your term

To repay the outstanding balance before the end of its term, you can request a redemption statement from us. This will confirm the amount to be repaid. Click here for more information on redeeming your mortgage. If you have not settled your outstanding balance two months after the end of your term, we will write to you with a demand for payment that includes a redemption statement detailing the full amount to be repaid.

  • Not repaying the outstanding balance by the end of your mortgage term could lead to the repossession of your home and may adversely affect your credit file.
  • If you are worried about your mortgage term ending Call us today on 0330 159 2590 * to discuss your options or to arrange a telephone appointment at a time that’s more convenient for you.

Repayment customers When you come to the end of your repayment mortgage term, you should have repaid your loan balance in full in accordance with the terms and conditions of your mortgage. For information on redeeming your mortgage, please click here,

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Do any banks do interest only mortgages?

Frequently asked questions – Who offers interest-only mortgages? While interest-only mortgages are less common than they used to be, they’re still being offered by a number of mortgage providers. You’ll find there are several building societies and banks that will provide interest-only mortgages to eligible borrowers.

Because you’ll only be paying the interest, lenders need to be sure you’ll be able to pay back the full loan amount at the end of the mortgage term – so you’ll have to provide details of how you plan to do this. This is why it’s often easier to get an interest-only mortgage for a buy-to-let property, as most landlords plan to use the property as an investment and use the rental return to cover costs.

Am I eligible for an interest-only mortgage? To qualify for an interest-only mortgage you’ll need to meet some strict criteria, but you should be eligible if you:

Have a deposit of at least 25% Have an annual income of more than £50,000 a year Have a repayment strategy that’s approved by the lender

What happens if I can’t keep up with my repayments? If you can’t afford your repayments, you should let your lender know straight away. Most lenders will want to help you find a solution. Your lender might be able to extend the term of your mortgage or reduce the interest rate you’re on, which could help to lower your monthly payments.

  • You might be able to take a mortgage holiday or make partial payments which could help with your cash flow.
  • If there are no more options left open to you, then repossession of your home is a possibility.
  • Mortgage lenders have the right to sell the property and use the proceeds to pay the balance of your loan, but this tends to be a last resort.

Can I switch to a repayment mortgage? Whether you can switch will depend on you meeting your lenders’ criteria for a repayment mortgage, but typically it’s fairly straightforward to switch products. You can switch mortgages by either transferring from an interest-only to a repayment mortgage with your existing lender, or remortgaging with a new lender.

With a repayment mortgage, your monthly payments are likely to increase, so you’ll need to work out what you can afford. Extending your mortgage term can help to decrease the payments. How much deposit will I need for an interest-only mortgage? Most lenders will only allow you to borrow up to 75% of the value of the property, this means you’ll need to have a large deposit.

Mortgage providers vary in the amount of deposit they require and the loan-to-value ratio they’ll lend, so it’s a good idea to compare mortgage offers from different providers to help you find the best deal.

What is a main disadvantage of the interest only loan?

The cons of an interest-only loan – Choosing an interest-only loan could be a risk for borrowers. Some cons with this type of loan include:

You’re not building equity in the home : Building equity is important if you want your home to increase in value. With an interest-only loan, you aren’t building equity on your home until you begin making payments towards the principal. You can lose existing equity gained from your payment : If the value of your home declines, this may cancel out any equity you had from your down payment. Losing equity can make it difficult to refinance. Low payments are temporary : Low monthly payments for a short period of time may sound appealing, but they don’t last forever — it doesn’t eliminate the eventuality of paying back your full loan. Once the interest-only period ends, your payments will increase significantly. Interest rates can go up : Interest-only loans usually come with variable interest rates. If rates rise, so will the amount of interest you pay on your mortgage.

What is a 10 year interest-only mortgage?

What is an interest-only mortgage? – An interest-only mortgage is a loan with monthly payments only on the interest of the amount borrowed for an initial term at a fixed interest rate. The interest-only period typically lasts for 7 – 10 years and the total loan term is 30 years,

After the initial phase is over, an interest-only loan begins amortizing and you start paying the principal and interest for the remainder of the loan term at an adjustable interest rate. Using an interest-only mortgage payment calculator shows what your monthly mortgage payment would be by factoring in your interest-only loan term, interest rate and loan amount.

The result is your estimated interest-only mortgage payment for the interest-only period and doesn’t account for the principal payments you’ll make later when the loan beings amortizing.

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How many people are on interest only mortgages?

FCA analysis reveals there are fewer than 1 million interest-only mortgages outstanding The number of interest-only (750,000) and part-interest-only (245,000) mortgages has halved since 2015, new FCA analysis has found. The fall is a result of borrowers moving in greater numbers onto repayment loans or repaying earlier than expected.

  1. Of those remaining, the greatest number of interest-only mortgages are set to mature in 2031 (72,000) and 2032 (77,000), with a smaller peak in 2027.
  2. This means borrowers without a repayment plan still have time to act and reduce at least some of their outstanding capital by the end of their mortgage.

Consumer research, commissioned by the FCA, found the vast majority of borrowers (78%) were aware of the need to have a repayment plan in place when they took out the mortgage. The research also showed that 82% of borrowers were confident in their ability to repay the outstanding capital at the end of the mortgage term.

However, the research suggests this may be overly optimistic – while 36% of borrowers expected some shortfall, modelling suggests this could be closer to 46%. Borrowers without a repayment plan are encouraged to speak to their lender to discuss their options. Simply speaking to your lender will not affect your credit rating, and steps can be taken now to provide a greater range of options at the end of the mortgage term.

David Geale, Director of Retail Banking at the FCA, said: ‘Whilst it is encouraging to see the number of interest-only mortgages reducing faster than expected, with the majority of loans being paid off or transferred to other products, the challenge remains for a significant number of borrowers.

  1. Taking an interest-only mortgage can mean lower monthly payments, but borrowers need a plan to repay the outstanding balance when the mortgage comes to an end.
  2. If you have an interest-only mortgage and are unsure if your current plan is sufficient, speak to your lender as soon as possible, to discuss your options.’ The FCA will now be engaging with industry and consumer groups to discuss the research findings and how lenders can further support borrowers who may not be able to repay all the capital owed at the end of their mortgage term.

Over the past decade, the FCA has put in place new rules and to make sure interest-only borrowers were being treated fairly, especially those at risk of not being able to repay. It carried out a to check the fair treatment of these borrowers. With the Consumer Duty now in effect, the FCA will review its existing guidance on the fair treatment of interest-only borrowers to ensure it is in line with the higher standards set by the Duty.

What happens if you pay interest-only?

Cons –

The interest rate could be higher than on a principal and interest loan. So you pay more over the life of the loan. You pay nothing off the principal during the interest-only period, so the amount borrowed doesn’t reduce. Your repayments will increase after the interest-only period, which may not be affordable. If your property doesn’t increase in value during the interest-only period, you won’t build up any equity, This can put you at risk if there’s a market downturn, or your circumstances change and you want to sell.

How much do I pay back on interest-only mortgage?

With repayment mortgages you pay off the interest and some of the capital each month, so that the mortgage will be cleared at the end of the term. With interest-only mortgages, you only pay off the interest on the amount you borrow. You use savings, investments or other assets you have (known as ‘repayment plans’) to pay off the total amount borrowed at the end of your mortgage term.

If you have a £100,000 interest-only mortgage for 25 years, you’ll pay the interest on the amount you borrowed each month. When the 25 years are up, you’ll have to repay the full £100,000. You must be able to show the lender how you’ll repay the mortgage at the end of the term. You, not the lender, are responsible for putting in place and maintaining a credible repayment plan to repay the original loan.

You can’t rely on the promise of a future windfall such as an inheritance or bonus. You also can’t speculate that property prices will rise enough to allow you to buy a smaller home and still pay off the mortgage. The lender will check at least once during your mortgage term that your repayment plan is on track to cover your mortgage.

  • cash saved in a savings account or ISA (although some lenders are no longer accepting this as a repayment vehicle)
  • stocks and shares ISA
  • pensions
  • investment bonds
  • shares
  • unit trusts
  • regular savings plans (endowment policies)
  • other properties or assets.
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Your lender will take a view about whether your chosen repayment plan looks likely to pay off the capital at the end of the mortgage. You need to put in the mortgage amount and the length of time you have until it ends. Then add in different rates of interest or growth you can expect on average over the term.

Pick a low and a high figure (2%-5%) to see the worst and best result. The value of investments can rise and fall and it’s possible that you could lose all of your money before you’re able to pay off your mortgage. It’s important to review your investments regularly. Ideally, you’d want to be able to switch into much safer cash-based products as the term of your mortgage gets closer.

That way you’ll have the peace of mind that you’ve got enough to cover your mortgage. Speak to a financial adviser about the best investment plan for you. It’s essential you review your investment plan regularly and take action if you think it won’t provide sufficient funds to pay off your mortgage.

  1. Contact your product provider, fund manager or financial adviser and ask if your investments are on track to repay your mortgage.
  2. Add up any separate savings beyond your repayment plan investments and see if you can release any of this money to reduce the loan if your lender will allow.
  3. Call your lender and ask about overpayments or switching to part repayment and part interest only. Check whether you’ll be charged any fees.
  4. If you’re worried that you won’t be able to repay the mortgage, contact your lender and explain the situation. If you can’t work out a solution with your lender, get free advice.

Where you want to remortgage to another lender, your new lender is likely to want to make sure that you can afford the loan and to put your repayment plan under scrutiny. This means that people with interest-only mortgages might find it difficult to get another mortgage.

What is the disadvantage of an interest-only mortgage?

The cons of an interest-only loan – Choosing an interest-only loan could be a risk for borrowers. Some cons with this type of loan include:

You’re not building equity in the home : Building equity is important if you want your home to increase in value. With an interest-only loan, you aren’t building equity on your home until you begin making payments towards the principal. You can lose existing equity gained from your payment : If the value of your home declines, this may cancel out any equity you had from your down payment. Losing equity can make it difficult to refinance. Low payments are temporary : Low monthly payments for a short period of time may sound appealing, but they don’t last forever — it doesn’t eliminate the eventuality of paying back your full loan. Once the interest-only period ends, your payments will increase significantly. Interest rates can go up : Interest-only loans usually come with variable interest rates. If rates rise, so will the amount of interest you pay on your mortgage.

What are the pitfalls of interest only mortgages?

Downsides of interest-only – The biggest drawback of an interest only mortgage is that you don’t pay off the loan as you go. This means you have to find another way to do this – you can’t just forget about it! Another downside of interest-only is that the total amount you repay over time will be greater.