Interest only mortgages for over 60s
Interest only mortgages for over 60s appeal because of the lower monthly repayments, however they’re not as common as repayment mortgages and much harder to get. Before the 2008 financial crisis, interest only mortgages were widely available and relatively easy to arrange. These days though, lenders are far more cautious.
So, what is so different about interest only home loans, why are they more difficult to arrange and should overs 60s looking for mortgages consider them?
The following information explains how these types of later life mortgages work and the pros and cons, so you can decide if an interest only mortgage is a good idea for you.
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What are interest only mortgages and how do they work?
With an interest only mortgage, your monthly repayments are against the interest, not the loan. The original capital borrowed is repaid at the end of the mortgage term, using some form or repayment plan such as savings or investments, commonly referred to as a repayment vehicle.
For example, if you have an interest only mortgage of £100,000 over 20 years, you’ll still have £100,000 to repay at the end of the 20 year mortgage term.
As you are only repaying the interest monthly, these mortgages have lower repayments. However, you must be confident your repayment vehicle will be sufficient to repay the original loan when due.
If you like the idea of repaying the interest but have concerns about repaying the loan at the end of the mortgage term, you may want to consider a retirement interest only mortgage. Aimed at older borrower, this type of interest only mortgage is repaid from the sale of your home, once you die or move into long term care.
How do you repay interest only mortgages?
You can repay interest only mortgages several ways. Examples of commonly used mortgage repayment vehicles include:
- Savings and ISAs
- Stocks and shares
- Investment bonds
- Unit trusts
- Regular savings plans and endowment policies
- Properties or assets
- Equity release
You will need to demonstrate how you plan to repay the loan when you apply for your mortgage. Your lender may then check on the progress of your mortgage repayment plan on a regular basis.
Can I have an interest only mortgage?
Being accepted for an interest only mortgage will depend on your financial situation and ability to repay the loan at the end of your mortgage term. Therefore, to improve your chances of qualifying for an interest only mortgage, it helps to have a good income and large deposit.
Before the 2008 financial crisis, you only needed to prove you could meet the monthly repayments on these mortgages, not the capital. As a result, thousands of borrowers were left struggling to make the final loan repayment.
These days fewer lenders offer this type of mortgage and thankfully lending criteria is much stricter.
What are the advantages of interest only mortgages?
The advantages of interest only mortgages are:
- Lower monthly repayments compared to repayment mortgages as you are only repaying the interest
- The ability to place the money you save on monthly repayments into investments that if successful, could lead to paying off the mortgage loan sooner
- Flexibility to use the money saved on monthly repayments to make home improvements that could increase the property value
Another advantage is for buy to lets. Property landlords often favour buy to let interest only mortgages as they can use the rental profit to repay the loan.
What are the disadvantages of interest only mortgages?
The disadvantages of interest only mortgages are:
- You will still owe the full amount at the end of your mortgage term whereas with a repayment mortgage you will own your property
- They are typically more expensive than repayment mortgages as you pay interest on the whole loan throughout the mortgage term.
- There is a risk that the repayment vehicle will be insufficient to repay the capital at the end of the mortgage term
Are interest only mortgages cheaper than repayment mortgages?
Interest only mortgage monthly repayments are cheaper than repayment mortgages as you only repay the interest. However, because the loan decreases on repayment mortgages, you pay less interest. This makes repayment mortgages cheaper overall, as with interest only mortgages, you pay interest on the full loan throughout the mortgage term.
For example, on a 20 year term interest only mortgage worth £100,000, you would pay interest on the full £100,000 for 20 years. However, with a repayment mortgage, as you are continually repaying some of the £100,000 each month, both the size on the loan and the interest reduce.
So, unless you can repay your interest only mortgage early, a repayment mortgage is usually the cheaper option.
Are interest only mortgages a good idea?
An interest only mortgage could be a good idea if you want low monthly repayments and have a suitable repayment vehicle to cover the loan when the mortgage term ends. However, it may not be a good idea if there’s a risk you won’t be able to repay the capital.
In this instance a repayment option may be a more suitable as you would have repaid both the interest and the capital by the end of the mortgage.
How do I find the best interest only mortgages?
To find the best interest only mortgage, it’s worth getting advice from a qualified mortgage broker. London & Country, Habito and Trinity Financial offer their services for free. They can talk through your requirements and financial situation to establish whether an interest only mortgage is a good idea for you.
Frequently asked questions
Why choose an interest only mortgage?
One of the reasons people choose interest only mortgages is the lower monthly repayments. Another advantage of an interest only mortgage is the flexibility to invest the money you save on monthly repayments. If the investment does well, you may be able to repay the mortgage sooner.
What happens at the end of an interest only mortgage?
At the end of an interest only mortgage you’re required to repay the capital. Therefore, you must have some form of repayment vehicle in place like savings or investments. As you’ve only repaid the interest throughout the mortgage term, the size of the original loan will have remained the same.
Why is it difficult to get an interest only mortgage?
Getting an interest only mortgage can be difficult as you need to meet the mortgage providers strict lending criteria and prove you will have sufficient funds to repay the capital at the end of the mortgage term.
What happens if I can’t repay my interest only mortgage?
If there is a risk you won’t be able to repay your interest only mortgage, speak to your lender straight away. They can talk you through repayment options which could include switching to a repayment mortgage, remortgaging, a retirement interest only mortgage or equity release.
Do interest only mortgages still exist?
Yes, interest only mortgages do still exist however not all lenders offer them. Also, compared to repayment mortgages, the lending criteria is strict, which rules out a lot of borrowers.
Who is eligible for interest only mortgages?
To be eligible for an interest only mortgage, you must be able to demonstrate that you will be able to repay the capital at the end of the mortgage term. It also helps to have a big deposit and good income.