Interest Only Mortgage Calculator

What exactly is an interest only mortgage?

An interest only mortgage is a type of home loan where your monthly payments only cover the interest charges, not the original amount borrowed (the capital). While this means lower monthly payments, you'll need to repay the full loan amount at the end of the mortgage term. This structure differs significantly from a traditional repayment mortgage, where you gradually pay off both interest and capital over time.

How do interest only mortgage payments work?

With an interest only mortgage, your monthly payment solely covers the interest on your loan. For example, if you borrow £200,000 at 3% annual interest, you'll pay £500 monthly (£200,000 × 3% ÷ 12 months). This amount remains constant if your interest rate is fixed, but can vary with a variable rate mortgage. Remember, these payments don't reduce your original loan amount - you'll still owe £200,000 at the end of the term.

What are the advantages of an interest only mortgage?

Interest only mortgages offer several potential benefits:

• Lower monthly payments compared to repayment mortgages
• Flexibility to invest the money you save elsewhere
• Potential tax advantages for buy-to-let investors
• Useful for property investors focusing on capital appreciation
• Can be beneficial for those with irregular income patterns

What are the risks and disadvantages?

Interest only mortgages come with significant risks that borrowers must carefully consider:

• The full loan amount must be repaid at the end of the term
• You're not building any equity in your property through your monthly payments
• Your chosen repayment strategy might not perform as expected
• Property values might fall, affecting your ability to sell or remortgage
• Interest rates could rise, increasing your monthly payments

How can I qualify for an interest only mortgage?

Lenders typically have stricter criteria for interest only mortgages. You'll usually need:

• A larger deposit (typically 25% or more)
• Higher income requirements compared to repayment mortgages
• A clear and viable repayment strategy
• Proof of assets or investments that could repay the loan
• A good credit history

What are acceptable repayment strategies?

Lenders will want to see a credible plan for repaying the capital at the end of the term. Common acceptable strategies include:

• Investment portfolios with a proven track record
• Savings accounts or ISAs specifically designated for mortgage repayment
• Expected inheritance
• Sale of other properties or assets
• Pension lump sums (though lenders may be cautious about this option)

It's crucial to regularly review your repayment strategy to ensure it remains on track to repay the mortgage.

Can I switch from an interest only to a repayment mortgage?

Yes, it's possible to switch from an interest only to a repayment mortgage, and many borrowers consider this as part of their long-term strategy. However, remember that:

• Monthly payments will increase significantly
• The switch might need lender approval
• You might need to pass new affordability checks
• The earlier you switch, the more manageable the monthly payments will be