Interest Only

What is an ‘interest only’ mortgage?
An interest only mortgage enables the borrower to have lower monthly repayments on a mortgage compared to that of a repayment mortgage. This is because borrowers are only paying the interest portion of the loan. However, at the end of the mortgage term, a repayment mortgage will have paid off the entire debt; the interest only mortgage will have the original loan balance still outstanding.

Interest only mortgages traditionally had some kind of repayment vehicle running alongside the mortgage loan such as an endowment policy or pension. This allowed the borrower to build up a fund to pay the mortgage off in full at the end of the term and if the fund had performed well, may even have left some capital profit for the policy holder.

Repayment

By choosing to take out your mortgage on a repayment basis you are guaranteeing that as long as you pay all of your mortgage payments in full and on time your mortgage will be repaid at the end of its term.

Each monthly payment consists of both interest and capital. Your monthly payments will vary depending on the term as the longer the term to repay the smaller the amount of capital repaid each month. When choosing your term for your mortgage it is wise to consider when you plan to retire and the retirement income you will have available.