You'll make interest only payments towards your mortgage for six months, with no impact on your credit score. You can cancel at any point, but you can only apply once. Your monthly payments will increase at the end of the reduced payment period to collect the amount you haven't paid.
Disadvantages of an interest-only mortgage
At the end of the mortgage term, you will still owe the lender the initial amount you borrowed. So, while you may be enjoying smaller monthly repayments, you'll need a plan in place for how you will pay back the capital.
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. You might be either unable or unsure of how to change your plans at the moment.
While interest-only repayments are lower during the interest-only period, you'll end up paying more interest over the life of the loan. There are also risks involved with getting an interest-only repayment loan.
Paying less interest means you'll have more money to save or spend on other wants or needs. And it can make paying your monthly bills easier. But even if these are all good things for your personal finances, the interest rate on your accounts doesn't actually affect your credit scores.
Important things to consider
There are limits to how long you can have interest only periods – the maximum interest only period at any one time is five years for owner occupiers and 10 years for investors (credit criteria applies). Interest only is not available in the last five years of your loan.
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. If you're looking to buy a second home, you may want to consider an interest-only loan.
Overpayments directly reduce the outstanding loan balance, making the final repayment amount smaller or potentially allowing you to pay it off entirely before the term ends. When making overpayments, please be aware that you may have to pay an early repayment charge to your lender (if applicable).
Yes; offset accounts can be linked to interest only loans. By keeping funds in an offset account, you can benefit from reduced interest expenses while enjoying lower monthly repayments during the interest only period.
Cons of Interest-Only Mortgages
Since there's no principal reduction until the amortization period begins, you end up paying more in interest over the life of the loan than you would with a conventional mortgage with the same repayment term.
After the interest-only period, you have the option to refinance, pay a lump sum, or begin paying down the principal. However, it's important to note that your monthly payments will increase significantly once you start paying both the principal and the interest.
Interest-only loans can be a useful financial tool for some borrowers, offering lower initial payments and flexibility in managing their finances. However, they also come with risks such as higher interest rates, payment shock, and limited equity buildup.
Many lenders will approve a temporary change from a regular (capital and interest) repayment plan to an interest-only one. This shift would allow you to drop the capital repayment and cover only the interest.
At the end of an interest-only mortgage, borrowers must repay the entire loan amount. Options include paying a lump sum, selling the property, remortgaging, or arranging extended repayment with the lender. Planning is crucial to avoid financial challenges and potential property repossession.
Credit scoring models don't consider the interest rate on your loan or credit card when calculating your scores. As a result, having a 0% APR (or 99% APR for that matter) won't directly impact your scores. However, the amount of interest that accrues on your loan could indirectly impact your scores in several ways.
But, from a money-saving perspective, you should seriously consider paying off your interest-only mortgage (at least in part) well before the term ends. The risk of not trying to reduce the balance you owe is that you'll be left with a large lump sum to pay off in future.
The main reason people choose interest-only mortgages is to reduce the amount they have to pay out every month. If you can afford the monthly payments on a repayment mortgage, that is usually the better choice.
You pay nothing off the principal during the interest-only period, so the amount borrowed doesn't reduce. Your repayments will increase after the interest-only period, which may not be affordable. The value of an asset such as your house or property, less any money owing on it.
Most interest-only mortgages are adjustable-rate mortgages (ARMs), which means your interest rate will adjust over time with the market. Because of this, you likely won't have predictable, fixed monthly payments. In some cases, your rate and payments will stay the same but only during the interest-only period.
If an early repayment charge doesn't apply then you can overpay as much as you like (without paying off your mortgage in full) without being charged.
There is usually no term or amortization period. As long as payments are made regularly, these loans can operate indefinitely. Interest-only loans can be secured or unsecured, depending on the situation.
With an interest-only home loan, you can keep the original debt separate. You can then put savings into an offset account against any debt that's not tax deductible.
Current mortgage interest rates in California. As of Sunday, January 12, 2025, current interest rates in California are 7.33% for a 30-year fixed mortgage and 6.61% for a 15-year fixed mortgage. This aligns with current national mortgage rate trends.