How To Pay Off A Flexible Interest Only Mortgage

A flexible interest only mortgage is a popular option with some homebuyers, especially since the repayments are typically lower than those on capital and repayment mortgages. As the name suggests, with a flexible interest only mortgage homebuyers repay only the interest on the mortgage, without repaying the actual loan. Although this seems like a risky proposition, some homebuyers have no choice if they are to afford property ownership.

For example, a flexible interest only mortgage may find favour with first-time buyers who don't have a lot of cash at their disposal. It's well known that it's taking longer and longer for first time buyers to afford property ownership, with the average age for buying a first home now at 29*. Even then, first time buyers may still be paying off student debt, so being able to pay only the interest for the first few years of home ownership could be a real boon.

A flexible interest only mortgage may also be suitable for landlords with a number of buy to let properties. They may prefer not to tie up their investment funds in capital repayments and instead rely on increased equity in their investment portfolio to repay their flexible interest only mortgage.

The Risks Of An Interest Only Flexible Mortgage

However, a flexible interest only mortgage is risky. Whether a borrower is a first time buyer, remortgager, home mover or landlord, there is no guarantee that any property will increase in value to the extent that it can repay the mortgage. That's why investment companies warn that the value of investments can fall as well as rise. Property is no exception. The risk is that if the property does not increase in value, there will not be enough left after sale to repay the flexible interest only mortgage, leaving the homeowner with a big headache and very empty pockets.

This is why many lenders who offer a flexible interest only mortgage insist that there is a repayment vehicle in place. This could be an ISA or an endowment policy. Alternatively, borrowers need to be prepared to sell their property to repay the debt at the end of the term. For example, Nationwide says that to qualify for its flexible interest only mortgage borrowers who are prepared to sell their homes must have at least 10 per cent equity in the home. Even then, Nationwide will only lend 90 or 95 per cent of the property value**.

Repaying An Interest Only Flexible Mortgage

Of course, there are other solutions to the question of how to repay a flexible interest only mortgage. One of these is to take advantage of the flexible features to overpay whenever finances permit. This means that some of the capital will be cleared. And if the flexible interest only mortgage is an offset mortgage, the credit balances in linked accounts and the daily calculation of interest will help to reduce the remaining loan.

Finally, borrowers with a flexible interest only mortgage need not wait till the end of the mortgage term to panic. Many lenders allow borrowers to switch from a flexible interest only mortgage to a repayment mortgage. Though this can lead to a sharp rise in mortgage payments, it may be worth it for those that want to keep their homes. And if the increase in payments is too sudden for borrowers' pockets, there is a half way house. Many lenders who provide a flexible interest only mortgage will allow borrowers to mix interest only and repayment options so they can be sure to repay their mortgage.

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