An interest only mortgage could be a more affordable way to buy a property in Ireland. Here’s how they work and what you need to know before you apply.
It’s a type of mortgage where you only repay the interest on your outstanding balance every month, not the capital.
Interest only mortgages are particularly popular with buy to let investors in Ireland because they keep their payments low while they earn rent from their tenants.
However, they can also be taken out by other borrowers in limited circumstances, for example homeowners struggling with mortgage arrears.
When you borrow using an interest only mortgage, at the end of the term, you’ll still owe the original amount you borrowed.
This means you’ll need to have another way to repay the balance when it’s due - this is sometimes called a repayment strategy.
In Ireland there are two main types of interest only mortgages:
With a pension mortgage you plan to pay off your mortgage balance at the end of your term using a personal pension policy. During the term of your mortgage you’ll have to pay:
This pension fund should grow in value over the term of your mortgage both through the contributions you make and the investment performance of the pension fund itself. Pension mortgages are designed to both:
However this is not guaranteed, if it performs poorly there is a risk your policy may not be worth enough to pay off your mortgage, also leaving you with less money in retirement.
With an endowment mortgage the aim is to pay off the mortgage balance at the end of your term using an investment policy called an endowment.
At the end of your mortgage term you close or cash in your endowment and use the funds to pay off your outstanding mortgage balance.
However, how much your endowment policy is worth depends on the investment performance of the endowment fund. If your endowment performs poorly it may not be enough to pay off what you owe.
How you pay off the mortgage balance is often based in part on the type of interest only mortgage you choose, but can also include other arrangements like:
You don’t have to pick just one of these options. Your repayment strategy could include a combination of different options to pay off your mortgage balance.
If you’re considering an interest only mortgage, you may wish to consider taking financial advice to help set up your repayment strategy.
If you already have an interest only mortgage, you need to regularly review how your repayment strategy is performing to ensure you’re on track.
This will allow you to make adjustments if it looks like there will be a shortfall.
Repayment and interest only are the two main types of mortgages in Ireland. The main difference relates to what’s included in your mortgage repayments:
If you’re a first-time buyer or a home mover a repayment mortgage is the most common option. Many mortgage lenders in Ireland simply won’t offer you an interest only option because they’re deemed to be a riskier choice.
However, if you’re buying a property to rent out then an interest only investment mortgage could be worth considering. Here are some of the pros and cons of each option:
Yes, you can usually re-mortgage and switch to a repayment mortgage, as long as you meet all the lenders affordability criteria.
You could also choose to move part of your balance onto a repayment mortgage and leave some on your existing interest only mortgage.
Find the best first time buyer and home mover mortgage deals in Ireland using our comparison.
This will depend on your individual circumstances but may be possible.
Extending your term will increase the amount you have to pay in interest over the course of your mortgage, but it could also give you more time to raise the funds you need to pay off the final mortgage balance.
If you’re thinking about extending the term of your interest only mortgage you should consider seeking financial advice first.
Yes, some lenders do offer a split mortgage, where part of what you owe is interest only and part is repayment.
Yes, you still need a valid mortgage protection policy if you choose an interest only mortgage.
Our guide to mortgage protection insurance covers the different types of insurance and which are best suited to interest only borrowers.
Yes, the same mortgage deposit rules apply to interest only and repayment mortgages.
This depends on your circumstances and the performance of your repayment strategy.
Your monthly mortgage payments will be lower than with a repayment mortgage, but because this payment doesn’t reduce what you owe, you’ll also need to pay into a repayment strategy as well.
Your monthly repayments will stop and the full mortgage balance will need to be paid back to the lender.
As you approach the end of your mortgage term you will need to arrange for the money in your repayment strategy to be ready, for example cashing in your endowment policy.
Your mortgage lender should also contact you before the money is due to explain how repaying your balance works.