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.
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.
Whether it's a good idea to change your repayment mortgage to interest-only depends on your individual situation. If you're looking to pay less each month, then switching to interest-only can help you free up some cash from your paycheck to go towards other things.
As the monthly payments on interest-only mortgages cover just the interest owed, they can often be hundreds of pounds cheaper than those for a repayment mortgage for the same amount.
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.
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.
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.
Property investors seeking tax benefits
As mentioned, interest-only home loans have potential tax benefits for property investors looking to sell within the interest-only period. Using an interest-only home loan for an investment property allows you to make higher tax deductions and limit your investment costs.
Share with a friend: Taking out an interest-only mortgage is one way to keep monthly repayments down, but you must keep in mind that you'll need to repay the original amount you borrowed at the end of the term.
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.
Interest-Only Mortgage Advantages and Disadvantages
Homebuyers have the advantage of increased cash flow and greater support for managing monthly expenses. For first-time home buyers, an interest-only mortgage also allows them to defer large payments into future years when they expect their income to be higher.
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.
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.
To qualify for an interest-only mortgage loan, you'll likely need: A credit score above 700. A debt-to-income (DTI) ratio below 36% A down payment of at least 15% (depending on the lender)
Can I get an interest only mortgage? 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.
If your lender agrees, you can often change your repayment mortgage to an interest-only mortgage. To initiate this switch, reaching out to your lender is the first step.
If you go for the government-backed six-month switch, your credit score won't be affected. You might not even need to go through any additional affordability checks in this case.
Interest-only repayments are available for a set period over the life of the loan. Up to 5 years on an Owner-occupied loan and 10 years on an Investment loan. Principal and interest repayments following an interest-only period will be higher than if you'd been paying both the principal and interest from the start.
The interest rate could be higher than on a principal and interest loan. So you pay more over the life of the loan. 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.
Key Takeaways. Customers can negotiate with credit card companies for lower interest rates. Seeking to negotiate a credit card rate can be a good solution in a variety of situations. Requesting a lower rate should not affect your credit score or credit account.
Because you're only paying the interest amount off your loan during your Interest Only period, you're not paying the loan balance (principal component), which means you'll pay more interest over the life of your loan.