Interest-only mortgages

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

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?

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 loan. Interest-only mortgages, on the other hand, repay only the interest from the loan for the duration of the term, so at the end, you still owe the amount you borrowed and need to have a way of repaying it.

How can I get an interest-only mortgage?

If you’re sure this is the right type of mortgage for you, your next step is talking to a lender. Banks can be wary of interest-only borrowers, but there are some things you can do to help your chances.

• 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?

Investors choose interest-only mortgages to minimise their monthly repayments while maximising cash flow. The risk with this strategy is that if property prices fall you can end up in negative equity – owing more than the property is worth.

What if I’m an owner-occupier?

Interest-only mortgages may not be a great option for owner-occupiers. Most owner-occupiers who choose these loans do so to minimise their monthly repayments. This is why banks are very hesitant to agree to an interest-only mortgage for an owner-occupier. If you can’t afford to make balance and interest repayments on your mortgage, it’s likely that you’ve borrowed more than you can afford.

What are the pros and cons of interest-only loans?

How can I find the best interest-only mortgage?

There’s no one best interest-only mortgage, but there are different ways to find out if a mortgage is the right one for you. You should compare interest-only mortgages on:

• 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

• My lender is raising rates. Can I remortgage my interest-only loan?

  It’s always a good idea to consider remortgaging if you can get a better rate. If you have an interest-only loan but aren’t investing (and don’t need the extra cash), it’s worth considering switching to a principal and interest loan so you can start reducing your mortgage debt. You’ll want to consider fees and charges. This is only general advice and the right decision will depend on your financial goals and circumstances.

  Remortgage your mortgage

• Can a mortgage broker help me?

  Interest-only loans can be harder to obtain than principal and interest loans. A good mortgage broker should be able to connect you with the right lender for your situation.

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