What is an interest-only mortgage, how to calculate your rates and how does repayment work?

One in five home-owners with a mortgage have interest-only mortgages, a loan in which you only pay the interest. This type of mortgage doesn’t reduce the amount of debt accrued, but it does mean that the payments are much smaller than other types of loans. However, at the end of the mortgage term, the entire balance needs to be repaid at the risk of returning the home back to the bank unless another way to pay the debt is available. This method of loan is suitable for those who have sufficient savings or investments to pay back the debt when due.

Key Takeaways:

Many buyers are at risk of losing their homes if they can’t pay back their home loans by the time they retire.
Interest-only mortgage terms have a normal range between 25 and 30 years.
Interest-only mortgage buyers should have substantial savings as the loan is often not extended.

“But when you reach the end of an interest-only mortgage term – which is the deadline by which your loan must be repaid (normally between 25 and 30 years)– you will have to hand the property back to the bank unless you have another way of paying the lump sum.”