The growth of property prices push banks to offer to their customers new financial deals then reserved for the professionals.

What is an interest-only mortgage?

It simply consists on paying the interest you owe throughout the mortgage term; in this type of borrowing, the refund of the whole capital is made at the end of the loan. You don’t have to pay your actual outstanding balance until the end of the mortgage commitment, contrarily to the classical fixed and variable rates mortgages where the borrower reimburses a part of the capital and interests.

The positive side of an interest-only mortgage is that the monthly repayments are considerably lower than a classic repayment mortgage. And also you have the possibility to switch to a classic repayment mortgage, later on.

+Interest only mortgages are quite popular for people who want to own a property with a tight budget. It is also a good solution for the buy to let market, because the French tax office allows the investor to deduct from its rental incomes the interests of its property borrowing. This is the reason why the interest-only mortgage is used in most cases to finance a rental investment. The ideal is having higher rents than interests to create a gap, directly attributable on the incomes of the taxpayer.

How to choose between classical and interest only mortgages?

The majority of the granted loans are fixed rate mortgages: monthly payments cover partly interests, and partly refund of the capital. Some borrowers prefer subscribing to an interest only mortgage: monthly payments cover interests only.
However, be aware of hidden disadvantages, because your debt is not reducing, it is necessarily for you to save on a side in order to pay off the loan! Do not rely on the property prices, which could fall.

For the buy to let market, take precautions as well, if you buy a property 100 000 €, with a leaseback of 5 000 €, you are having a profit of 5%, if the property market rises up, and you can resale your house 150 000 €, the leaseback will remain 5 000 €, becoming a profit of 3.75%. More difficult to sale! The profitability makes the value of the investment, not the property market.

What is happening at the end of an interest-only mortgage term?

If you didn’t make monthly payment into a saving plan, you may have to sell your property, or to remortgage it. After all, interest-only might not be the best mortgage plan?
Moreover, in case of reversal of the property market, the buyer could have to sell the property at a loss.

Our recommendation would be:

Interest-only mortgages are convenient:

• The property market is increasing or you can expect potential capital gains,
•  For specific properties such as the “nue-propriété” scheme where you buy a property at 60% market value but no income during 15 years,
• For a property you plan to resell quickly,
• In order to reduce initials payment if you have the opportunity to switch to a repayment mortgage.

Interest-only mortgages are not convenient:

• For properties whose profitability makes the value of the investment such as leaseback properties,
• When the property market is already quite high and prices may remain stable or decline,
• For a property you do not plan to resell such as a second home or a home you plan to retire.