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Interest-Only Mortgage Costs

Will the benefits of an interest-only mortgage outweigh the costs? Here’s what to consider.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 15, 2022

The costs attached to an interest-only mortgage are high and leave you with the full loan amount to pay off at the end of a term. However, there are circumstances where this kind of borrowing can be preferred.

It’s vital to have the whole picture before you go ahead with searching for an interest-only loan, and it’s advisable that you seek professional help beforehand to determine what the costs might be and what implications you could be facing in future. Our guide outlines the details.

How much does an interest-only mortgage cost?

The monthly payments will be significantly cheaper than a repayment mortgage would be as you’d only be paying the cost of the loan – the interest – rather than the capital and interest sum of the mortgage debt, like you would with a repayment mortgage. The actual figure of those payments will depend on what interest rate your lender is willing to offer you within your mortgage deal.

Bear in mind that while your monthly payments will be lower than if you were to have a standard repayment mortgage, the overall cost of the loan over the term will be higher. This is because you will still need to pay for the loan debt in full at the end of the term, but you will have paid a higher rate of interest over the years.

There are additional fees to take into consideration too, which we will outline further down.

What other factors affect the costs?

  • Term length: While it won’t change the rates you’ll pay, the length of your term will determine how much you pay in the long term. A longer term will mean paying higher interest for longer. If you want to have the benefits of interest-only now, but decide you want to change to a repayment at some point, this is possible, and your interest rates will reduce then.

Deposit amount: Because of the higher risk nature of interest-only, you are likely to receive a lower loan-to-value offer from lenders. Typically they will stretch to 75% minimum, although some will go higher. You will be deemed a more favourable candidate if your deposit is higher, and would therefore be more likely to secure a low interest rate.

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Calculate what you could be paying

To get an idea of what an interest-only mortgage might cost you, use our simple online calculator below. The calculator is set to repayment mortgages for comparison purposes but you have the option to convert the results into interest only afterwards.

calculator icon

Mortgage Repayment Calculator

Our mortgage repayment calculator can tell you how much your mortgage will cost you each month and overall. Enter the amount you’re borrowing, the term length and interest rate, and our calculator will do the rest.


Enter the amount you're borrowing
£
2.5% is an average figure but the rate you get may vary
%
25 years is average, but most lenders offer longer and shorter terms
years

Monthly Repayments:

Interest Only:

Total amount paid at end of term:

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Remember that these figures are estimated on broad assumptions and don’t factor in all of the many nuances that come with mortgage applications. To get a more detailed and accurate measurement on how much you will be paying, speak to a specialist broker for a more tailored calculation.

Example costs

These tables compare interest-only costs against repayment to show what the difference over the full mortgage term can be. These examples are based on a 5% interest rate paid over a 25-year term. Bear in mind that repayment mortgage deals usually come with a lower interest rate, but for the sake of direct comparison, we will keep these figures the same:

£50,000 property

Cost per month Full term cost (£50k + interest) Total interest paid Balance to pay at full term
£208 £112,544 £62,544 £50,000
£292 £87,721 £37,721 £0

£100,000 property

Cost per month Full term cost (£100k + interest) Total interest paid Balance to pay at full term
£417 £225,091 £125,091 £100,000
£585 £175,441 £75,441 £0

£200,000 property

Cost per month Full term cost (£200k + interest) Total interest paid Balance to pay at full term
£834 £450,182 £250,182 £200,000
£1,170 £350,882 £150,882 £0

£300,000 property

£300,000 property Cost per month Full term cost (£300k + interest) Total interest paid Balance to pay at full term
Interest-only £1,251 £675,273 £375,273 £300,000
Repayment £1,754 £526,321 £226,321 £0

Other costs and fees to consider

There are additional fees that come on top of your payment detailed above. These are:

  • Arrangement fees: A set-up fee from the lender, also known as product or completion fee, which can reach as high as £2,000. You can add it to your mortgage or pay upfront.
  • Valuation fees: A basic survey to check on your property by the lender, the cost of which varies and some will do it for free.
  • Stamp duty: A tiered land tax to pay if you buy property or land worth more than £125,000.
  • Legal fees: Also known as conveyancing, this includes everything legal to do with your purchase, from the solicitor’s time to transfer fees to searches and land registry. These can also reach upwards of £1,000.

How a broker can help you save money with an interest-only mortgage

Working with a broker who specialises in interest-only mortgages is highly advantageous for a number of reasons, primarily because they understand the niche market and they also have access to hidden corners of the mortgage landscape that the average borrower does not.

An experienced and impartial advisor will also grasp the intricacies of this kind of borrowing and what the implications can be, so they will provide support and guidance as well as a practical service in scouring the deals and securing you the right one.

It’s important to recognise whether interest-only will be a stable and prudent decision in the long-term, and such a weighty financial decision can be daunting. A good broker will help point you in the right direction and assist you through your application process, while negotiating on your behalf.

Is it worth the extra overall cost?

For some people. While you’re not clearing any kind of balance on your loan, interest-only mortgages can be ideal in certain circumstances. For example, property developers will receive cash flow benefits from the reduced monthly bills, and still reap the rewards upon a sale in the future when ideally the property price will have increased.

Paying only interest instead of capital can also work for people who want to make immediate savings to spend their money elsewhere, but also have expected financial wealth in the years to come to comfortably pay the property off in full, either through windfalls in inheritance, house price rises, stocks and shares or other investment payouts.

There is an element of jeopardy involved with interest-only mortgage deals and not even experts can always see into the future, however a good advisor will be able to help you navigate through your decision and weigh up the risk versus reward.

Get matched with an interest-only mortgage specialist

The specialist interest-only brokers we work with are highly skilled and experienced and always have your best interests at heart. They are fully qualified, reach five-star customer service ratings and understand the many details and complexities that come with interest-only borrowing.

We can begin matching you with the right advisor today for an initial, no-obligation free consultation. Call us on 0808 189 2301 or make an enquiry. We look forward to hearing from you.

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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different mortgage subjects.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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