An interest-only mortgage is a payment choice where you only pay off the interest during your mortgage period, so your monthly payments are typically lower.
As you’re paying off the interest as it accrues, your loan won’t get any bigger. However, your borrowed balance (capital) won’t change since you’re not paying off the loan itself (only the interest).
At the end of your interest-only mortgage, you’ll need to repay the full amount borrowed.
You can apply for an interest-only mortgage on a residential or buy-to-let basis.
Many lenders have strict interest-only mortgage criteria for residential properties, such as having a high income, a good credit score, or a large home deposit.
However, you’re less likely to qualify for an interest-only residential mortgage if you’re a first-time buyer or in a lower income bracket. If this applies to you, we have other mortgage payment options that may be more suitable.
When you apply for an interest-only mortgage, you need a repayment plan (known as a repayment vehicle). This demonstrates to the lender that you’ll have some way of paying off the debt in the future.
Repayment vehicles include:
Without a repayment vehicle, you may not qualify for an interest-only mortgage.
Explore: Ways to help you get a mortgage
If eligible, you may be able to switch to an interest-only mortgage. However, this needs careful consideration.
Keep in mind – lenders may have a minimum income requirement, typically between £75,000 to £100,000. You’ll also need a repayment vehicle, such as ISAs, savings, or bonds and shares, which will vary depending on your provider.
At the end of your agreed mortgage term, you need to repay your loan in full.
Your lender will contact you a year before your mortgage period ends to remind you of the repayment deadline. They’ll contact you again 3 months before the deadline and once more before the date approaches.
Before the mortgage period ends, you’ll pay off the balance using the repayment vehicle discussed at the start of the mortgage. If your circumstances have changed, you’ll need another way to pay off the balance.
If you’ve reached the end of your interest-only mortgage and can’t repay the borrowed money, it’s important to let your provider know.
Here are some options:
Some lenders can extend interest-only mortgages by up to 20 years. The lender will need to assess your income, credit history, and repayment vehicle again to make sure you can make the final payment later.
If a mortgage extension isn’t possible, you can move your mortgage to a new provider. Since you’d be a new applicant, your income, credit history, and repayment vehicle will be assessed to make sure you can afford the loan.
If you can afford larger monthly payments, a capital-repayment mortgage can reduce the lump sum at the end of your mortgage or even pay it off completely.
If you’re an HSBC customer and you're worried about paying your mortgage – we’re here to help.
Your home may be repossessed if you don’t have sufficient funds to repay the capital balance outstanding at the end of the term.
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