Finance Made Easy: Everything You Need To Know About Interest Only Mortgage


In the past couple of years, it seems like an interest-only mortgage has increased in popularity for many reasons. To many people, it's an exciting option because their monthly payments are not as high as they would be on a standard one.

Even though a lot of people are familiar with this advantage, there are still some aspects of it they do not quite understand. Many of them are not sure who provides these loans and when is the perfect time to get one.

If you are one of them, and still have lots of questions related to this topic, then you've come to the right place, because today we've conducted thorough research to provide you with some more useful details. Let's uncover them together!

Person holding a pen and paper in his hands.


Understanding How Interest-Only Mortgage Works

What Does It Represent?

There are some differences between interest-only mortgages and full-payment mortgages. The biggest one is the fact that you are not obligated to make payments on a monthly basis in order to pay off the overall debt.

Instead, the only thing you should do is to pay off the level of interest that you already have on your loan. This just goes to show that monthly repayments are frequently less than they would be in comparison to the traditional mortgage deal.

Furthermore, when it comes to the only-interest mortgage, you are only obligated to pay off the cost of taking out the loan from the lender. This means that when your mortgage term comes to an end, you will have to pay off the total amount of debt.

Usually, this whole process is done through a repayment vehicle that represents an investment scheme, like ISA or any other type of saving. Now, if you do not have the means to pay off the debt, then you will be forced to sell your house to pay it back.


Can You Calculate It Easily?

The answer is yes! And it's not as difficult as it may appear to be due to the fact that you can utilize an interest-only mortgage calculator. If by any chance you need this information, and you're from New Zealand, you can always rely on an Interest only mortgage calculator in NZ that will efficiently do this task for you. But how does it work in general?

Namely, this tool was developed to help you quickly figure out the payments and expenses associated with this type of mortgage. It will show you how much you can decrease the loan balance by creating additional payments, as well as the interest you can save up by doing this.


Adding More Useful Information Below

How Can You Pay It Off?

A lender would first have to see the type of repayment plan before they give any approval. And they usually include:

  1. Cash ISA or savings in your savings account
  2. Shares and stocks ISA
  3. A regular savings plan, like an endowment policy
  4. Investment in shares, bonds, and unit trusts
  5. A pension from which you can take a twenty-five percent tax-free lump sum
  6. Separate assets or properties you could potentially sell

calculator and a notebook on top of money

Bear in mind that not every single lender will perceive every type of repayment option as acceptable. For instance, some of them do not think that savings are the best strategy and it's up to them to decide whether you have the right plan in place or not.

There are some other types of repayment options that lenders frequently do not approve and they include:

  • Bonus from work, or potential inheritance
  • That you are relying on a rise in the value of your property that would enable you to settle the mortgage with the remaining money


What Can You Do If You Cannot Repay It?

Just like with any other type of mortgage, you are obligated to repay this one as well, however, if you're not able to, the lender has every right to repossess your house if you do not repay it by the end of the term.

On a more positive note, if you are approaching the end of your interest-only mortgage deal, yet, you are worried that you are not going to be able to pay it off, there are still some things you can do:

You can always replace it with a repayment mortgage
Extend the mortgage term
Overpay the mortgage
Utilize some of your pension
Sell up


All this information that was provided in this article sounds very tempting and promising, however, before you decide to take any loan, you should first get yourself familiar with everything and then make a decision.



This article was published on 12/22/2021.