Interest Only Mortgages
Is this mortgage type the best for you?
What Are Interest-Only Mortgages?
An interest-only mortgage means your monthly payments cover just the interest on the loan, not the original amount borrowed (the capital). As a result, your monthly payments will be lower compared to a repayment mortgage.
However, at the end of the mortgage term, you will still owe the full amount you originally borrowed. To qualify for this type of mortgage, you’ll need to demonstrate to the lender that you have a reliable repayment plan in place—such as investments or savings—to repay the capital in full when the term ends.
Types of Mortgage
01.
Fixed Rate Mortgage
A fixed rate mortgage lets you lock in an interest rate for a specified period—typically 2, 5, or even up to 10 years. During this time, the interest rate and your monthly repayments remain unchanged, regardless of fluctuations in the market.
Advantages
The key benefit of a fixed rate mortgage is payment stability. Your monthly repayments stay consistent throughout the fixed term, making it easier to manage your budget and plan your finances with confidence.
Disadvantages
On the downside, fixed rate deals may not always offer the most competitive interest rates. Additionally, if you decide to exit the mortgage before the end of the fixed term, you could face substantial early repayment charges.
02.
Tracker Mortgage
A tracker mortgage is a type of variable rate mortgage that moves in line with the Bank of England base rate. Your interest rate will always remain a fixed percentage above the base rate, meaning it can go up or down as the base rate changes—usually on a monthly basis.
This means your monthly payments can vary, depending on how the base rate shifts.
Advantages
Tracker mortgages often come with lower interest rates than fixed rate deals, especially when the base rate is low—making them an attractive option for cost-conscious borrowers.
Disadvantages
If you’re on a tight budget, a tracker mortgage might not be ideal. Since monthly payments can rise without warning, it’s important to be confident that you can afford potential increases before committing to this type of deal.
03.
Tracker Mortgage
A tracker mortgage is a type of variable rate mortgage that moves in line with the Bank of England base rate. Your interest rate will always remain a fixed percentage above the base rate, meaning it can go up or down as the base rate changes—usually on a monthly basis.
This means your monthly payments can vary, depending on how the base rate shifts.
Advantages
Tracker mortgages often come with lower interest rates than fixed rate deals, especially when the base rate is low—making them an attractive option for cost-conscious borrowers.
Disadvantages
If you’re on a tight budget, a tracker mortgage might not be ideal. Since monthly payments can rise without warning, it’s important to be confident that you can afford potential increases before committing to this type of deal.
04.
Variable Rate Mortgage
A variable rate mortgage means you’ll pay interest based on the lender’s Standard Variable Rate (SVR). This rate can change at any time at the lender’s discretion, often influenced by economic conditions and movements in the broader lending market.
Advantages
If interest rates go down, your monthly payments will likely decrease as well. Additionally, variable rate mortgages often come with no early repayment charges, giving you the flexibility to pay off your mortgage early without facing penalties.
Disadvantages
While the initial rate might be low, variable rate mortgages are typically less competitive than fixed or tracker deals. The unpredictability of monthly payments can also make budgeting more difficult.
FAQs
In order to qualify for the best residential mortgage rates, it is best to have a deposit of 30% to 40% of the property’s value. Lenders often offer their best rates to those who are able to put forward a larger residential mortgage deposit as they are perceived to lower risks. This is due to borrowing less and there will be enough equity in the property to cover any short term fluctuations in property values.
Your Loan to Value (LTV) ratio represents the amount you borrow compared to the total value of the property. For example, if you’re buying a £200,000 home and have a £40,000 deposit, you would need to borrow £160,000. This gives you an 80% LTV—meaning the loan covers 80% of the property’s value, while your deposit makes up the remaining 20%.
The most competitive mortgage rates are typically available at a 60% LTV, which is considered one of the lowest and most favourable borrowing brackets. However, many borrowers fall into the 75%–80% LTV range, which still offers attractive rates and manageable monthly repayments.
For first-time buyers, 90%–95% LTV mortgages can be a practical route onto the property ladder. While interest rates may be higher at this level, it allows buyers with smaller deposits to purchase their first home.