Interest-Only Mortgages

There are two main types of mortgage borrowing:

• Repayment mortgages, also known as capital and interest mortgages
• Interest-only mortgages.

These days, most mortgages are taken out on a repayment basis.

If you have a repayment mortgage, each month you will pay off some of the loan you borrowed to purchase your property (the capital), plus interest.

By the end of the mortgage term, you will have fully paid off your original loan and the interest, provided that you have maintained all required payments.

With an interest-only mortgage, monthly payments to your lender only cover the interest on the amount borrowed – they don’t pay back the capital loan used to purchase the property.

This means that you will have to repay the outstanding capital by the end of the mortgage term.

To make sure you can pay back your mortgage, you will need a suitable repayment strategy that will cover the outstanding loan amount.

You can also combine the two borrowing types – as an example, if you were borrowing £100,000, you could borrow £80,000 on a repayment basis and £20,000 on an interest-only basis.

Interest-only mortgages can be tempting, as the monthly repayments can be much lower due to the fact that you're only paying the interest.

But you have to remember there’s a big lump sum that needs to be paid off!

If you want an interest-only mortgage, you must have a suitable repayment strategy (also referred to as a repayment vehicle) to pay off the capital balance at the end of the mortgage term. 

At Monmouthshire Building Society, we can only offer you an interest-only mortgage if we consider your repayment strategy to be acceptable.

When we consider interest-only mortgage applications we accept the following repayment strategies:

1. With-profits or unit-linked endowment policy

2. Sale of another UK property

3. Pension lump sum*
4. Cash savings 

* Please note we only accept repayment from the 25% portion of your pension that you can withdraw tax-free. This is because you should reserve the other 75% for living expenses during retirement.

Some people plan to pay off their interest-only mortgage with an expected inheritance or by selling their company, but these are riskier strategies which we would not accept.