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Mortgage on Interest Only
Interest only mortgages are becoming very popular as they help reduce the monthly payments for borrowers wanting a new mortgage or remortgage but want to keep their outgoings down to a minimum.
Interest Only Mortgage deals are typically used by private investors looking to purchase a buy to let property with the monthly rental covering the mortgage payments - more and more however, borrowers are looking at interest only mortgages as a way of reducing monthly payments in order to either clear bad debt or get on the property ladder.
To give you some idea of the differences between repayment and interest only we have given a couple of examples below.
| Repayment @ 4%, 25 yrs | Interest Only @ 4%, 25 yrs | |
|---|---|---|
| £100,000 | £533.43 | £333.33 |
| £200,000 | £1,066.87 | £666.67 |
As you can see from the simple examples above, the monthly mortgage payments on an interest only mortgage can be as low as almost half the comparable repayment mortgage!
Can an interest only mortgage help with bad debt?
When people with bad credit or bad debt apply for a mortgage, typically called a bad credit mortgage they will normally have to use a specialist lender with higher interest rates than those offered by the high street bank or building society - the higher interest rates can sometimes make the new mortgage or remortgage a little expensive, placing the new loan on an interest only basis will allow the remortgage or mortgage to go through at an affordable level whilst the borrower repays the bad debt. Once the bad debt has been repaid (typically at least 12 months after the bad debt has been repaid) the borrower should be able to apply to a high street lender through a broker to get the best deal.
Although the mortgage is being paid on an interest only basis the mortgage borrower will still find various differences between products and the normal fixed rates, discounted, standard variable and tracker rates will still be available, having the mortgage on interest only simply means that they will not be repaying any of the capital which is why most who are not using the mortgage for a buy to let will remortgage onto a full repayment mortgage at a later date.
