By: Sarah Williams 

Are you considering a mortgage and wondering if an interest-only option could be a good fit for you? In this article, we'll explore interest-only mortgages and help you determine whether they align with your financial goals and circumstances. While interest-only mortgages offer certain benefits, it's important to weigh the pros and cons to make an informed decision about whether they are right for you.

With an interest-only mortgage, your monthly payments go towards covering the interest on your loan, but not the actual loan amount. This setup leads to lower monthly payments, especially in the beginning. Unlike traditional mortgages, where you chip away at both the amount borrowed and the interest, the principal loan amount remains unpaid. At the end of the mortgage term, you are expected to pay off the full amount in one go.

One of the key advantages of interest-only mortgages is the lower monthly payments during the fixed period. This can be particularly beneficial if you have limited cash flow or want to focus on other investments. 

However, you'll need a solid plan to repay the loan once the mortgage term ends. You could save up, invest, or sell the property to cover the loan. Skipping this step could lead to financial troubles or even losing your home.

A significant risk of an interest only mortgage is property prices falling. Property values can rise and fall over time, and if the value of your property decreases, it may impact your ability to repay the loan or refinance in the future. Understanding the potential risks associated with property prices falling is important when considering an interest-only mortgage.

Oh, and heads-up: Most lenders will want proof of a repayment strategy, plus a sizable deposit (unless it's a buy-to-let mortgage). It is also important to note the interest you'll pay on an interest-only mortgage tends to be higher compared to a repayment mortgage. See below for examples. 

Given the risk, it is best to carefully weigh the pros and cons before diving into the world of interest-only mortgages.
 

Pros

Your monthly payments are lower than with a repayment mortgage

You could make a profit if house prices increase and/or you have made home improvements

You can use the extra cash flow however you like

Cons

At the end of the mortgage term, you will have to pay off the full amount in one go

You will pay more interest because the loan amount has stayed the same

You could end up out of pocket if you don’t keep up with a repayment plan
 

Before making any decisions, it's highly recommended to seek professional advice from a mortgage advisor. We can provide personalised guidance, to assess your suitability for an interest-only mortgage. Give us a call today or drop in to us at our Birmingham or Lichfield offices.