An interest-only mortgage is an attractive option for people looking to finance their homes. Find out what an interest-only mortgage is, its pros and cons, and the best options available.
What is an interest-only mortgage?
An interest-only mortgage is a mortgage you take without making periodic repayments. Instead, you only pay interest on the loan amount. This means that with this type of mortgage, you do not make any repayments; at the end of the loan, you have to repay the amount in one go. As a result, your mortgage debt remains the same during the term unless you make repayments over time. You are usually allowed to repay 10-20% penalty-free per year.
Advantages of an interest-free mortgage
An interest-only mortgage has several advantages. First, your monthly expenses are lower because you only pay interest. Second, you have the flexibility to decide whether you want to repay an amount or not. If you have extra money, you can use it to reduce your mortgage.
Disadvantages of an interest-only mortgage
The disadvantages of an interest-only mortgage are that your interest rates are usually higher than other mortgage types. Usually, the difference is 0.05 to 0.2%. Also, the amount you eventually repay is generally higher. If you don't make repayments, the amount you end up repaying becomes higher because you pay interest on the loan amount.
How do you get an interest-only mortgage?
With most mortgage lenders, you can get an interest-only mortgage up to 50% of the market value of your home. After that, you have to repay the other half. For example, with an annuity or linear mortgage. If you want to take out an interest-only mortgage, make an application to your bank.
An interest-only mortgage is an interesting option to finance your home. It has advantages, such as lower monthly charges and flexibility, but disadvantages, such as higher interest rates and a higher final repayment. However, an interest-only mortgage can be a great way to finance your home if you get it right.
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