Interest-only mortgages look cheap because the monthly payments are low. But the total cost over the full term tells a different story.
On an interest-only mortgage, your total cost is the sum of all your monthly payments plus the original loan amount you still owe at the end. For a £150,000 loan at 5.5% over 25 years, you pay £687.50 a month for 300 months, which is £206,250 in payments. Then you still owe £150,000. Your total cost is £356,250.
On a repayment mortgage for the same amount, your total cost is £275,400. The interest-only option costs £80,850 more. But here is the twist: with interest-only, you had £230 more in your pocket every month for 25 years. If you invested that £230 a month and got 5% returns, you would have roughly £135,000 at the end of the term. That more than covers the £150,000 balloon payment.
The maths changes depending on what you do with the monthly saving. If you spend it, interest-only costs you more. If you invest it, interest-only can work out better. That is the decision you need to make, not the lender.
The formula
Total Cost = (Monthly IO Payment × n) + Principal
Why this matters
Interest-only costs more overall if you spend the monthly saving. If you invest it, the maths can work in your favour. The decision is yours, not the lender’s.
Running these calculations before you buy is the difference between a good investment and an expensive lesson. Xelox Properties can help you evaluate any deal.