can someone please explain interest only mortgages to me

[stopthenoise]

We're currently on a standard base rate mortgage (I think). I lost my job a few months ago and finances are becoming a struggle so it would be great if our biggest outgoing could be made a little easier for us. One of my friends said she is on an interest only mortgage and her monthly payments are a lot lower. How do they work and how does it affect the long term of your mortgage? Please feel free to explain as clearly as you can, I am not the most financially savvy TIA

You only pay the interest on the loan - you are not repaying any part of the capital. Generally they are only viable if you have some other means of paying off the capital (ie the loan amount) at the end of the term.

Most banks don't offer them anymore. You only pay the interest part of the mortgage and not the balance so the amount you owe stays the same

Yes, like the others said, you only pay off the interest so if you have an interest only mortgage for £100k you will only pay the interest and in 25 years you will still owe £100k to the bank so you will need some way of paying the mortgage. We have an interest only mortgage on a house that we rent out; it works for us as the monthly repayments are very low and the rent we get each month goes into a savings account. We are not bothered that at the end of 25 years we'll still owe the bank what we borrowed as we are saving the rent to pay the mortgage off and the mortgage isn't at the full house value anyway and we could always sell the house and pay the bank back. Hope that makes sense!!

If you talk to your mortgage company, they may be able to do something for you in the short term at least, either going to interest only or giving you a break from payments for example. But whatever it is it would have to be a fairly short term arrangement as you would not be reducing the amount you owe them, which means your mortgage will take much longer to clear.

But mortgage companies would rather you talk to them and agree something rather than risk missing payments without planning ahead, it makes them more comfortable to see that you are thinking and planning.

Have a look at the spreadsheets on this thread
www.mumsnet.com/Talk/site_stuff/1715581-Cost-of-credit-cards-and-mortgages-the-spreadsheets
you can put in your numbers and compare the options over time

When we had an interest only mortgage we were paying £400 a month in mortgage and £100 a month in endowments to pay off the mortgage. Doesn't always work out well.

Thanks for all your replies. I've already spoken to the mortgage lender and explained our situation but they said there is nothing they can do for us as my partner is working. We asked for a payment holiday initially but apparently losing your job is not a good enough reason to take a break

We had the same issue last year Stop. Lloyds were not in the least bit caring.

Interest only mortgages tend to work for properties that will go up in value so you have no worries about paying off the mortgage when you sell.