Types of mortgages
With an interest-only mortgage you only pay the interest on the amount you borrowed. This enables you to make cheaper monthly payments, but the overall amount of debt remains the same as what you originally borrowed.
This differs from a repayment mortgage in which you pay the interest and some of the capital each month, which reduces the overall amount borrowed.
With interest-only mortgages, once the term is over you still owe the lender the amount you initially borrowed and are obliged to pay it back.
Because of this, interest-only mortgage customers are usually encouraged to make plans into place at the start of their loan – such as an investment, an endowment policy or an ISA – as ‘repayment vehicles’ to help them repay it and lenders will want to see evidence that these plans are in place.
Check what you can afford
Lenders want to know whether you’ll you be able to afford it should interest rates go up, which they are likely to do, or if your circumstances change. They take into account not only how much you are earning but how much you’re spending.
Review your credit report
Try to ensure the information and data on your credit report is accurate and up to date, as your lender will usually want to check your credit report as well as the information you provide on your application form.
Build up your credit score
When assessing your application, lenders will combine your credit report data and application details to give you a credit score which helps them decide how much to lend to you and at what rate. If you’ve got a good credit score, lenders will regard you as a safer bet, making you more likely to get the credit you want.
To help show lenders that you can pay bills responsibly and on time, some simple well-managed forms of credit, like a mobile phone account can help build your credit score.
Register to vote at your current address, as many lenders use it to help them double-check that you live where you say you live.
Do your research
It’s always a good idea to spend time researching different types of mortgage deals available in market and review each of these against both your present and future needs.
Have a long term plan
With interest only mortgages it could be risky to solely rely on being able to sell the property at a much higher price to pay off the mortgage at the end of its term, or a future financial boost such as an inheritance or a high income.
It’s also best to review investments and repayment vehicles regularly, as these can go down as well as up, to ensure that as the mortgage life increases your cover is safer.
The lender is likely to check on occasion during the interest-only mortgage term that your repayment plan is on schedule to pay it off.
Try to make sure you keep up with mortgage repayments as your home may be repossessed if you do not keep up repayments on your mortgage.
Making overpayments can be an option to help reduce the overall debt if your interest-only mortgage allows it. Some lenders allow for you to switch to a repayment mortgage if your circumstances change and you are able to make the increased monthly repayments.