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Interest Only Mortgage Formula:
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An interest-only mortgage is a type of mortgage where the borrower only pays the interest on the loan for a set period, typically 5-10 years. The principal amount remains unchanged during this period, and at the end of the term, the borrower must repay the full principal amount.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual interest rate to a monthly rate and applying it to the principal amount.
Details: Understanding your monthly interest-only payments helps in budgeting and financial planning. It's crucial to remember that you'll need to repay the full principal at the end of the interest-only period.
Tips: Enter the principal amount in pounds (£) and the annual interest rate as a percentage (%). Both values must be positive numbers.
Q1: What happens at the end of the interest-only period?
A: You must repay the full principal amount. This is typically done through savings, investments, selling the property, or refinancing to a repayment mortgage.
Q2: Who is eligible for interest-only mortgages in the UK?
A: Lenders have strict criteria. Typically, you need a high income, excellent credit score, and a credible repayment strategy for the principal amount.
Q3: What are the advantages of interest-only mortgages?
A: Lower monthly payments during the interest-only period, which can free up cash for investments or other purposes.
Q4: What are the risks of interest-only mortgages?
A: The main risk is not being able to repay the principal at the end of the term. Property value may also decrease, leaving you with negative equity.
Q5: Can I switch from interest-only to repayment mortgage?
A: Yes, many lenders allow switching, but this will increase your monthly payments as you'll start paying both interest and principal.