Costs of an Interest-Only Mortgage

The costs of 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 apply for an interest-only loan. It’s advisable to seek professional help beforehand to determine the costs and potential implications. Our guide outlines the details.

How much does an interest-only mortgage cost?

The monthly payments will be significantly cheaper than a repayment mortgage 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 for those payments will depend on what interest rate your lender is willing to offer you during 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 interest rate over the years.

There are additional fees to consider, 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 will likely receive a lower loan-to-value offer from lenders. Typically, they 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.

Calculate what you could be paying.

To understand 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 can convert the results into interest only afterwards.

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 of 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 the difference over the full mortgage term. These examples are based on a 5% interest rate 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

£100,000 property

£200,000 property

£300,000 property

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 several reasons, primarily because they understand the niche market and 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 its implications. 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.

Other costs and fees to consider

Additional fees are included in your payment, as detailed above.

These are:

• Arrangement fees: A lender’s set-up fee, also known as a product or completion fee, can reach as high as £2,000. You can add it to your mortgage or pay it upfront.
• Valuation fees: The lender will conduct a basic survey to check on your property. The cost 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, legal fees include everything legal related to your purchase, from the solicitor’s time to transfer fees to searches and land registry. These can also reach upwards of £1,000.

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 expect 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 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 of interest-only borrowing.

Today, we can match you with the right advisor for an initial, no-obligation free consultation. Call us on 0330 818 7026 or make an enquiry. We look forward to hearing from you.