Interest Only

With an interest-only loan, you only pay off the interest on the loan for a fixed period, rather than paying off the interest and principal. Interest-only loans are an option if you cannot initially make higher repayments.

At the end of the interest-only period, the loan will change to a principal and interest loan and you will start repaying the amount borrowed as well as the interest, which will increase the amount of your repayments. You should work out what your repayments will be at the end of the interest-only period and make sure the higher repayment amount is affordable.

It will take you longer to pay off the loan because you will still have to pay off the principal after the interest-only stage. You will pay more interest overall.

In a falling house price market, you will face a greater risk that you will end up owing more than your house is worth. The faster you pay down your loan the more likely it is that you will owe less than your house is worth (this is called having equity).

With an interest-only loan, the loan balance does not decrease over time until the interest-only period expires, and you start paying off the principal as well as the interest.

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