Keeping mortgage payments low is an important consideration for many clients, especially those who are looking to maximise their cash flow. One of the primary reasons for choosing an interest-only mortgage is the lower monthly repayments. By paying only the interest portion of the mortgage, clients can significantly reduce their monthly payments compared to a traditional repayment mortgage.

This can be particularly attractive for clients who have other investments, such as stocks or rental properties, that they can use to pay off the capital balance at a later date. Examples to why an interest-only mortgage might be the right option for you,

  • Reduced payments in the early years
  • Liquidity event in the future
  • Sale & downsize planned
  • Part & part structure with an element on Interest only and some on repayment
  • Inheritance tax planning

It is important to note that interest-only mortgages may not be suitable for everyone, and it is crucial to seek advice from a trusted advisor to determine the appropriate repayment structure. It is important to remember that with an interest-only mortgage, you will still owe the full amount at the end of the term.

Advantages of interest only mortgages

Interest only mortgages offer a range of benefits to borrowers. For example, interest-only mortgage payments tend to be significantly lower than capital repayment mortgages because the borrower is only paying off the interest. For property investors, this can help cash flow management and is especially useful for individuals with fluctuating incomes or businesses needing to allocate funds across other investments.

Whether borrowers are considering a fixed rate interest-only mortgage or a variable rate interest-only mortgage, those expecting a financial windfall may find lenders are more flexible with regards to making overpayments or repaying the capital loan in lump sums. Some may also propose an interest-only with repayment mortgage. In doing so, borrowers are able to reduce the outstanding balance when they have additional funds available.

For older borrowers, or those who may be looking to downsize in the future, interest only mortgages can be part of strategic financial planning. Clients may consider selling their property at the end of the term, using the proceeds to pay off the mortgage and potentially downsize to a smaller home, freeing up capital for retirement.

To be eligible for an interest only mortgage, lenders will want to ensure clients have a strong financial position. In addition, they may also consider the type of property (non-standard constructions are not so appealing to interest-only lenders), a good credit history and a healthy deposit can improve your chances of qualifying.


How do interest only mortgages work?

Interest-only mortgages function by allowing borrowers to pay only the interest on the loan for a specified period, usually the initial years of the mortgage term. During this time, monthly payments cover the interest charges but do not contribute to reducing the principal amount borrowed. After the interest-only period, the mortgage typically converts to a standard repayment structure, where payments cover both interest and principal.

Will banks allow interest-only mortgage?

Yes, banks do offer interest-only mortgages, but eligibility criteria and availability may vary among lenders. Banks may assess the borrower’s financial situation, creditworthiness, and ability to manage the repayments during the interest-only period before approving such mortgages. Not all borrowers may qualify for interest-only options, and it’s essential to discuss specific terms with the chosen bank.

Why do people take out interest only mortgages?

People opt for interest-only mortgages for various reasons:

Lower Initial Payments: Monthly payments during the interest-only period are lower, providing initial financial relief.

Investment Opportunities: Borrowers may choose this option to free up funds for other investments or to take advantage of investment opportunities.

Cash Flow Management: Individuals with irregular income or expecting future income increases may use interest-only mortgages for better cash flow management.

What do I need to qualify for interest-only mortgage?

To qualify for an interest-only mortgage, borrowers typically need:

Strong Credit Score: A good credit history enhances eligibility.
Stable Income: Lenders assess the borrower’s ability to make payments during and after the interest-only period.
Loan-to-Value Ratio: Lenders may have specific requirements regarding the loan amount compared to the property value.
Financial Resilience: Demonstrating financial stability and the ability to manage repayments is crucial.