Interest-Only Calculator: Work Out Your Interest Payments

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What Is an Interest-Only Mortgage?

An interest-only mortgage is a type of mortgage where you only pay the interest on the loan over the mortgage term. You aren't required to make any repayments towards the principal loan during this time, so your monthly payments will be lower than what you'd pay with a standard repayment mortgage. 

For example, if you have a 25 year, £200,000 mortgage with a 3% interest rate, your interest-only payments would be £500 rather than almost £950 on a repayment mortgage. Our interest-only calculator will help you calculate how much your monthly interest payments will be. Just enter the amount you want to borrow and the interest rate.

Despite making monthly payments, the amount you'll owe the lender remains the same with an interest-only loan, and you'll need to find £200,000 to pay the lender at the end of the mortgage term.

Unless you intend to sell your property when your mortgage term ends, the idea behind an interest-only mortgage is that you save or invest the difference to ensure you have the money to pay off the original loan. As some borrowers can't do this, most lenders require them to provide evidence of their intended repayment plan, with a large deposit, before considering them for an interest-only mortgage.

Can I Get an Interest-Only Mortgage?

Interest-only mortgages are often harder to get than repayment mortgages. Lenders want evidence that you can pay off the lump sum at the end of the mortgage term. You're more likely to be accepted for an interest-only mortgage if you earn a high salary and have ample savings or a big deposit.

If you're approved for an interest-only mortgage, your lender may want to occasionally check that your repayment plan is on track. Getting an interest-only mortgage is easier if you plan to buy a buy-to-let property. In fact, almost all buy-to-let mortgages are interest-only. Lenders have the reassurance that the property can be sold at the end of the term and that the sale proceeds can be used to pay off the loan.

Is an Interest-Only Mortgage Suitable for Me?

Whether an interest-only mortgage suits you will typically depend on your financial situation and tolerance for risk. If your income is irregular or you want to invest in other assets, you may find the prospect of lower monthly payments during the interest-only period an attractive option.

Interest-only mortgages pose a higher risk than repayment mortgages as you're not reducing the principal loan balance during the mortgage term and will face a large lump sum at the end. You'll also need to have a realistic repayment plan in place and be confident that you can afford to pay back the loan.

What Happens at the End of an Interest-Only Mortgage?

With an interest-only mortgage, you'll have to pay off the original loan amount in one lump sum at the end of your mortgage term. If you don't think you'll be able to repay your interest-only mortgage at the end of the term, you may be able to negotiate an extension from your lender or switch to a different type of mortgage. If you cannot pay the lump sum or find a suitable alternative, your lender may repossess the property to recover the loan.

Repayment Plans for Interest-Only Mortgages

An interest-only mortgage requires you to have a realistic repayment plan that will ensure you can pay off the balance. Some of the ways you can do this include:

• Selling the property, ideally for a profit
• Using your savings
• Taking a lump sum from your pension
• Selling investments
• Taking out another mortgage

You'll need to regularly review and make appropriate adjustments to your repayment plan to ensure you stay on track. Your lender will want to see that you have a repayment plan before they approve you for an interest-only mortgage.

What Is the Best Interest-Only Mortgage for You?

The best interest-only mortgage for you will be the one that suits your financial circumstances. Interest-only mortgages typically charge higher rates than repayment mortgages, and you'll usually have to put down a larger deposit. You'll also need to consider the interest rate, the lender's eligibility criteria, whether the lender is comfortable with your repayment strategy, and the flexibility of payment schedules and overpayments.

A whole-market mortgage broker like John Charcol can compare interest-only deals from different lenders to help you find the best interest-only rate for your needs.