The Pros and Cons of an Interest only Mortgage

An interest only mortgage can be very appealing to homeowners who have other large outgoings. This type of mortgage has its own set of advantages and disadvantages, and these should be considered before making your final decision. Here’s a quick breakdown to give you an idea of the positives and negatives: 

Pros: 

1. Lower Initial Payments: During the interest-only period, your monthly payments are significantly lower since you’re only paying the interest. 

2. Increased Cash Flow: With lower payments, you have more disposable income for other investments or expenses. 

3. Flexibility: It can be beneficial if you plan to sell the property or refinance it before the interest-only period ends. 

4. Short-Term Ownership: Ideal for those who don’t plan to own the home long-term, such as investors or frequent movers. 

Cons: 

1. No Equity Build-Up: Since you’re not paying off the mortgage balance, the only way your equity grows is if the property value grows and the percentage you own grows proportionately. 

2. Higher Future Payments: Once the interest-only period ends, your payments will increase significantly as you start paying both the mortgage and interest. Or you will need to start a repayment strategy, a plan to pay it back. Either a lump sum which you will use at the end, have a plan to downsize, sell the property or a switch to repayment later which, the longer you wait could make it more expensive monthly. 

3. Market Risk: If property values decline, you could owe more than the home is worth, also known as negative equity, making it difficult to sell or refinance. 

4. Stricter Qualifications: These loans often require a lower Loan to Value (LTV) meaning a larger deposit. Higher incomes, lower debt-to-income ratios, and good-to-excellent credit scores. 

Would you like to know more about how these mortgages work or explore other mortgage options? It’s always best to discuss all your options with the mortgage advisor before deciding on which mortgage option to take. 

Here at TS Mortgage Specialists, we can explore all the options to support you in your mortgage decision. 

*Your home may be repossessed if you do not keep up with the mortgage repayments.