Should You Get An Interest-Only Mortgage Right Now?

With interest rates continuing to rise, homeowners are keen to keep mortgage payments manageable. And one option to consider is switching to an interest-only mortgage.

In June, the government unveiled its Mortgage Charter as part of efforts to support homeowners.  So far, 85% of mortgage providers have signed up, including major lenders such as Barclays, Nationwide and Santander.

The charter is a commitment on behalf of lenders to offer flexibility where required to help homeowners manage mortgage payments in the short term. It includes the possibility of temporarily switching to an interest-only mortgage via your existing provider.

How do interest-only mortgages work?

As the name suggests, repayments cover the interest but don’t reduce the balance of your mortgage. This makes monthly repayments more affordable but means you’ll have an outstanding balance at the end of your mortgage term.

Typically, borrowers pay into an endowment or other type of savings account to ensure they have the money to clear their mortgage balance when their loan expires.

Benefits and drawbacks of interest-only mortgages

The main benefit of switching to an interest-only mortgage is that monthly payments are cheaper than with a standard repayment mortgage. But without a suitable repayment vehicle, you’ll end up paying more in the long term as you will borrow over a longer period.

Depending on how much your monthly repayments come down, other monthly expenses and your attitude to risk, you could find yourself able to invest what you save and make it work for you. But you should never do this without first getting advice from a professional.

Invest poorly, and you could end up compounding your mortgage struggles.

There is also a risk that your repayment vehicle will come up short and leave you having to raise additional funds to clear your mortgage.

How a broker can help

According to the Mortgage Charter, borrowers are entitled to contact their lender (provided it’s one of the 85%) to discuss their options. It’s important to remember, though, that your existing lender can only advise on their own products.

So, it makes sense to speak to an independent broker first. This will make sure you understand all your switching and borrowing options before contacting your lender. In some cases, your best bet might be to switch providers (even if it involves paying a fee) to reduce your overall cost of borrowing.

Is an interest-only option a good idea for first-time buyers?

There is no single answer to this question as it will depend on your individual circumstances. Typically, lenders ask for a bigger deposit for interest-only mortgages. But it’s certainly an avenue worth exploring when buying your first home in the middle of a volatile period.

A first-time buyer interest-only mortgage could be the difference between getting on the housing ladder now or delaying your purchase. Once again, you should definitely get independent, professional advice at the earliest possible opportunity.