Interest-only mortgage

How does an interest-only mortgage work?

Here you pay only interest on the borrowed sum each month, nothing more. Because you make no repayments along the way, your monthly costs stay low. There is one big catch in return: at the end of the term the full sum is still outstanding and you have to pay it back in one go. For example from savings, from the sale of your home, or by taking out a new mortgage.

Important tax rules

Take out a new interest-only mortgage today and you no longer get mortgage interest relief on it. That has been the case since 1 January 2013. If you already had one before that date, you fall under the transitional rules, subject to conditions. And note: since 2011 you can usually finance at most half of the property value on an interest-only basis.

Interest-only mortgage calculation example

Take a home worth € 300,000 and an interest-only portion of at most 50%, so € 150,000, at 4% interest. Your monthly payment is then purely interest: € 150,000 × 4% / 12 = roughly € 500 per month. That € 150,000 does stay outstanding, though, and has to be repaid at the end of the term.

Pros and cons

Pros

• Low monthly payments, because you only pay interest.
• Maximum tax benefit if the mortgage was taken out before 2013 and falls under the transitional rules.
• Flexibility: often combinable with other mortgage types.

Cons

• You build no capital and the debt remains outstanding.
• New interest-only mortgages have no right to interest relief.
• At the end of the term you must be able to repay the entire principal.
• At most around 50% of the property value can be interest-only.

Is an interest-only mortgage right for you?

Do you want low monthly payments and have a concrete plan to repay the principal later, through savings, investments or the equity in your home? Then this type can fit. The tax rules are fairly strict, though, so get yourself properly briefed before you choose. An adviser will look at what is sensible in your case, without obligation.