can someone explain exactly how an interest only mortgage works please???

thebaddeleys

Me and my husband are thinking of looking into an interest only mortgage to pay off our £25k loans,were trying to work out if that would work out or not.

our mortgage payment each month is £975.00 this is on a £154,000, so roughly how much would we save each month if we did interest only?

can anyone help or give advice ?

many many thanks,

Kerry

silvercar

Adding loans to a mortgage has two big disadvantages. You are changing unsecured debt for secured debt ie you could lose your house if you don't keep your repayments. Sacondly you are paying off your debts over a much longer timescale and will end up paying out more money.

interest only caluculations: outstanding amount x interest rate / 100 /12 for monthly repayment.

Interest only mortgage never repays the capital amount, at the end of 25 years you will still have to repay all the capital. How?

eg £154,000 at 5% would be £641.66 per month.

TangentMan

The important part about an interest only loan is as Silvercar mentions that you will never pay off the loan through the mortgage.

As the name suggests, an interest only loan means your monthly payments are only covering the interest on the original debt. At the end of the term you will then have to pay back the original loan amount (in your case at leasr the £154k or more if you add other borrowing).

Typically this is done my the funds released by an investment or other assets / savings.

thebaddeleys

what i meant was that if we put it on interest only and then the money we wold have spent on the repayments we could save up to pay off the loans, i.e we have a £12k loan i was trying to work out how long it would take to pay that off if we save dup the extra money we'd have if we did IO?

silvercar are you saying our payments would be £641 per month, it thought i'd be paying 30% of what we pay now (£975) is that completely wrong?

thanks for replying by the way

silvercar

What interest rate are you paying? £641 is true if your interest rate is 5%.

Your lender may charge if you move from repayment to interest only, could be £200 one off fee.