Interest-Only Mortgage Deals (2024)

FAQs

Do banks still offer interest-only mortgages? ›

Interest only mortgages are available for home buyers, although they're not as common as repayment mortgages. To get one, you'll need a plan in place to repay what you owe when the mortgage ends. As with any other mortgage, whether you're approved is at the lender's discretion.

Fewer lenders offer them, and banks have set stricter requirements to qualify. Banks generally only offer an interest-only mortgage to a well-qualified borrower. You'll likely need: A credit score of 700 or more.

Interest-only mortgages can seem more affordable, but they tend to cost more overall; you'll also need to find a way to pay off the loan at the end of the term. Repayment mortgages cost more per month but less over the loan's lifetime - and will pay off your mortgage in full.

Yes. Interest-only repayments are available on fixed rate loans.

Can I change my mortgage to interest only? You could switch to an interest only mortgage from a repayment mortgage but there are some considerations. It will depend on whether you meet our mortgage criteria and also have a repayment plan in place to ensure you can settle the mortgage loan at the end of the term.

If you're interested in keeping your month-to-month housing costs low, an interest-only loan may be a good option. Common candidates for an interest-only mortgage are people who aren't looking to own a home for the long-term — they may be frequent movers or are purchasing the home as a short-term investment.

The disadvantages of interest-only mortgages

Another downside of an interest-only mortgage is that the total amount you repay over time will be much higher than a repayment mortgage. Finally, it is harder to find interest-only mortgage deals, especially if you're a first-time buyer.

It can still be possible to get cheap rates with a higher LTV. For example, the best interest-only mortgages available right now (April 2023) for 75% LTV comes with initial interest rates as low as 3.99% (4.1% APRC). And even with an 80% LTV, there are still mortgage deals to be found for similar rates.

Initial periodDuring this time (which typically lasts three to 10 years), you'll only make payments on the mortgage's interest. Your payments won't reduce the principal balance or build equity in your home. (However, you may still build equity if your home's value rises over that time period.)

For the first few years of an interest-only mortgage term, you'll just pay interest each month. You might not qualify for an interest-only mortgage; you need a high credit score among other things. You won't build equity in your home until you start making payments toward the mortgage principal.

How much deposit do you need for an interest-only mortgage? ›

Typically, lenders offer up to 75% of the property's value for an interest-only mortgage. This means that you'll need a deposit of at least 25%. As interest-only mortgages pose more of a risk for lenders than repayment mortgages, many lenders ask for a much higher deposit, such as 40% or 50%.

If you have an interest-only mortgage, you need to make plans to repay the capital (the amount you borrowed). If you don't, you will have a large amount to pay at the end of your mortgage term and may need to sell your home to repay it.

One of the significant drawbacks of interest-only mortgages is the higher long-term cost. Because borrowers are not reducing the principal balance during the interest-only period, they end up paying more in interest over the life of the loan compared to a traditional amortizing mortgage.

A typical interest only mortgage lasts between five and 25 years. It's possible to remortgage to a new deal at any time, which is often a good idea if interest rates have changed. You can also remortgage at the end of the deal – but you will need to meet affordability criteria.

Interest Only mortgages may be suitable for you if you:

Are looking for a maximum mortgage term of 25 years. Have an acceptable repayment strategy in place to repay the capital lump sum at, or before, the end of your mortgage term. Can provide evidence to support your repayment strategy during the application process.

An interest-only mortgage is a home loan with a unique perk: For a few years, you can make very low payments that only cover interest. Following that period, you can either refinance, pay the remaining balance in a lump sum or begin making regular monthly payments.

You can borrow up to 85% loan to value (LTV) on a Capital Repayment basis. But only 75% can be on an Interest Only basis by using an additional repayment strategy.

NONTRADITIONAL mortgages, such as interest-only and negative amortization loans, became very popular in the run-up to the 2007–2008 financial crisis (Dokko et al., 2019). These products were associated with an increased risk of default during the Great Recession, even among prime U.S. borrowers (Amromin et al., 2018).