What are the funding options for an interest only mortgage?

August 13, 2017 by Brendan O'Neill

Advice & Tips

Around 20% of UK homeowners have an interest only mortgage, with many of them not having a plan to repay the outstanding debt at the end of the term.

An interest only mortgage allows the borrower to repay just the interest accrued on the debt, but not repaying any of the capital. This means that at the end of the term, the whole amount of capital becomes payable. Ideally, a borrower will have a plan for paying off the capital at the end of the mortgage term. For borrowers who have sufficient funds, it may be possible to save money each month – perhaps in an ISA or investment products – so that there are funds available at the term’s end.

Remortgaging may be an option for some homeowners who have reached the end of their term. However, you will have to pass an affordability test and credit checks for a lender to offer you a mortgage. There may also be a problem if your home has fallen in value since you bought it, as you will have to make up the shortfall.

Overpayments are not an option as, unlike a repayment mortgage, they will not reduce the capital, but will reduce the amount of interest you are charged over the course of the mortgage term.

Endowment policies are an alternative option. You pay an amount into an endowment policy, alongside the interest repayments. At the end of the term, the endowment policy should cover the amount of capital outstanding. However, there have been problems in past years, so it is crucial to keep a check on projected figures. A CeMAP qualified mortgage advisor will be able to guide you through the options.