Interest-only mortgages
Compare interest-only mortgages for investors and homebuyers and read more about how these mortgages work.
Interest-only mortgages differ from standard mortgages in the way they are repaid. Traditional repayment mortgages have repayments that include both the interest and a small proportion of the principal. Interest-only mortgages, on the other hand, repay only the interest on the loan for the term. While you make interest-only repayments you won’t be reducing your debt, and need to have another way of repaying what you borrowed.
How do interest-only mortgages work?
How can I get an interest-only mortgage?
- Have a bigger deposit. Many banks are more willing to consider an interest-only mortgage if you have a lower loan-to-value ratio (LTV). A bigger deposit, usually at least 20%, will make you a more attractive borrower.
- Have a plan. Lenders will want to know why you want an interest-only mortgage rather than a repayment mortgage. If you can explain your justification for the loan and demonstrate your investment plans, you’ll be in a much better position.
- Consider a non-bank lender. Non-bank lenders are unique in that they raise funds through wholesale markets rather than customers’ deposits. Because of this, they’re not held to the same requirements as banks. Non-banks are regulated and have to abide by responsible lending obligations.
Why would I want an interest-only mortgage?
What if I’m an owner-occupier?
What are the pros and cons of interest-only loans?
Pros
- Lower repayments. With an interest-only mortgage, you’ll have lower repayments compared to a comparable principal and interest loan.
Cons
- Market risk. There is higher risk than you have with repayment deals because you need to find a way of repaying your loan at the end of the term, which is usually an investment. Even if you plan to sell the property to repay the loan, the property’s value may have fallen, leaving you with not enough to cover the debt.
How can I find the best interest-only mortgage?
- Fees. Look for an interest-only mortgage with low up-front and ongoing fees.
- Interest rates. Interest rates are naturally the key element of these interest-only deals.
- Features. Many borrowers opting for interest-only mortgages also opt for 100% offset accounts to reduce interest payments (as you’re not charged interest on the amount of debt that is matched by savings in your linked offset account). Other features, such as the ability to make extra repayments, might be important.
I have a few more questions about interest-only mortgages
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