Interest-Only Mortgage Costs
Trying to find out the true cost of an interest-only mortgage? Our in-depth guide will tell you how much you'll have to pay with this type of mortgage!
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Author: Pete Mugleston - Mortgage Expert, MD
Updated: March 02, 2022
Interest only mortgages can be more affordable on a monthly basis than a repayment mortgage.
On the flip side, you’ll pay more interest overall and still have to pay off your initial loan at the end of the mortgage term.
In this guide, you’ll get a comprehensive look at the costs of an interest only mortgage and the options you have for paying them.
The following topics are covered below...
How much does an interest-only mortgage cost?
This will vary depending on the size of the mortgage, the interest rate you end up with and the term length.
On top of this, there are additional fees and taxes to factor in.
Monthly payments on an interest only mortgage only cover the interest charged on the full balance of the loan, while the debt itself is usually settled at the end through a repayment vehicle.
The current average UK house prices is £270,708, so let’s work with that as an example. With a 25% deposit of £67,667, you’d need to take out a loan of £203,041.
If you took out an interest only mortgage for this amount with an interest rate of 5%, you’d have to pay £847 per month.
The total you would repay over the full term would be £457,027 – including the original loan of £203,041 plus £253,986 in interest.
It’s important to note that your monthly payments won’t reduce any of the original amount you borrowed, unless you agree to make optional capital repayments to your lender.
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How does this compare to a repayment mortgage?
With a capital repayment mortgage you’ll have to make larger monthly repayments.
This is because you agreed to pay off the full value of the loan by the end of your mortgage term through combined monthly interest and capital payments. As you’re reducing the value of the loan with each payment, the overall interest you’ll pay will be lower.
Again, if you wanted to take out a mortgage for a property costing £270,708 with a 25% deposit, you’d need to borrow £203,041.
If the interest was at 5%, paying this back would cost you £1,187 a month. Over 25 years you’d pay back £356,216 – £203,041 plus the total interest of £153,175.
Try our calculator below to compare the cost of your mortgage on a repayment agreement versus an interest-only deal.
Mortgage Repayment Calculator
Our mortgage repayment calculator can tell you how much your mortgage will cost you each month and overall. Enter the amount you’re borrowing, the term length and interest rate, and our calculator will do the rest.
Total amount paid at end of term:
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How a mortgage broker can help you reduce your costs
If you know the exact amount you want to borrow you should speak to a mortgage broker for bespoke advice on how much an interest only mortgage will cost you.
A broker who specialises in interest-only mortgages can help you save money on your mortgage by matching you with the most cost-effective interest-only deal that fits your requirements. They will base this on the overall cost of the mortgage.
For example, there’s no point taking out a low-fee deal if the interest rate leaves you out of pocket in the long term.
Beyond this, they’ll search the market for the lender most likely to give you the best rates and give you an accurate idea of what you’ll need to pay each month.
They’ll even help you compare these figures to see if a repayment or part-and-part mortgage might be a better option.
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Fees and tax for interest only mortgages
There are a number of things you’ll need to pay for when you’re taking out an interest only mortgage.
It’s important not to overlook them as they can add a considerable amount to the overall cost of the property.
These additional costs include…
You’ll have to pay your lender a fee for setting up your mortgage.
This is called the arrangement fee, or sometimes a product fee or completion fee. How much you pay can vary significantly – even up to £2000.
You can either pay the arrangement fee off when you take out your mortgage or add it to the mortgage amount itself.
Remember it’ll cost you more overall to do the latter as it counts as a loan which you’ll have to pay interest on.
Your lender will conduct a basic survey to check your property is suitable to act as security for the mortgage loan. The cost of this varies, but some lenders will throw it in for free.
Your legal fees will include all the costs you need to pay to make sure the legal side of a house sale or purchase is handled properly.
This process is called conveyancing.
You’ll have to pay:
- Your solicitor for their time: This can either be a flat fee or a percentage of the value of the property. On average this can be anything from £500-£1000.
- Money transfer fees: This is for moving cash between lenders, conveyancers, yourself and the seller
- Land registry fees: You’ll need to pay this government department to register a home with a new owner. How much this costs varies depending on the property price.
- Searches: Your solicitor or conveyancer will carry out a number of searches to make sure there aren’t any problems with the property you’re planning to buy.
How much stamp duty you’ll pay
Stamp Duty Land Tax is a tiered tax that you have to pay when buying land or a property if it costs over £250,000.
Use our calculator below to work out how much you will have to pay based on the property type, value and other variables.
Stamp Duty Calculator
This calculator can tell you how much Stamp Duty Land Tax you will need to pay on your property purchase, whether you're a first-time buyer, a home-mover or in the market for an investment property.
Your stamp duty to pay is:
Your effective tax rate is
Now that you've worked out how much stamp duty is payable, it's a good idea to talk to a broker about your mortgage options. They can help you make sure you aren't paying over the odds with all costs and fees factored in.
Can you afford the monthly repayments?
Your mortgage lender will run an affordability assessment to ensure you can afford the monthly repayments on the loan.
They’ll work this out by looking at your bank statements and your other monthly outgoings and existing debt, which can include credit cards, personal loans, car finance and more.
The mortgage they’ll offer you will be based on a multiple of your income, usually 4.5 times your salary, though some lenders stretch to five times or even six times.
What lenders are happy to accept varies, which is why speaking to a broker is so key.
Some lenders set minimum income requirements that an applicant must earn in order to apply.
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How much deposit you’ll need
For an interest only mortgage, most lenders will want you to have an LTV of 75% – meaning you’ll have to put down a deposit of 25%. Some will accept an LTV of 80% or 85%, though.
Lenders often want to see larger deposits for interest only mortgages as further evidence you will be able to pay off the lump sum at the end of the mortgage term.
They’ll explain this in terms of the loan-to-value ratio (LTV) they accept.
Get matched with an expert in interest only mortgages
The best way to save money on an interest-only mortgage is to speak to a specialist broker.
They’ll be able to give you unique impartial advice – establishing whether your repayment vehicle is safe, for example.
They’ll also be able to calculate the true cost of an interest only mortgage, and advise you whether this is in fact the right option for you, or whether a repayment or part-and-part mortgage might be better suited to your needs.
Because they’re aware of the entire market, an interest -only mortgage broker will be able to advise you which lenders are most likely to accept your level of deposit or income, and help you navigate any blockers.
Through our free broker-matching service, you can be paired with the interest-only mortgage specialist who’s best placed to help you get the outcome you need.
Call 0808 189 0463 or make an enquiry and we’ll set up a no-obligation chat between you and them today.
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About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!