Do Banks Give Interest-Only Secured Loans?

Yes. You can take out a secured homeowner loan on an ‘interest only’ basis.

Over the last few years, ‘interest only’ secured loans and mortgages have become more and more common. Their main advantage is that they make your monthly secured loan payment lower. This is because you are only paying interest on the loan, not any of the amount you actually borrow.

Of course, the flip side is that you need to have a way of repaying the secured loan at the end of the term. If you know that you have a lump sum coming to you at a set point in the future (an inheritance, the maturity of a savings plan or a pension lump sum) then an ‘interest only’ loan may be ideal for you. You can repay the amount you borrow with your lump sum and simply pay the interest on the borrowing in the meantime.

However, ‘interest only’ loans where you don’t have any way of repaying the capital that you borrow can be risky. Other things being equal, you will never pay off your secured loan - meaning that you will always owe the amount you borrowed at the outset.

Unless you have a specific way of repaying the secured loan, you should always consider setting it up on a ‘repayment’ basis. Using this method, your monthly repayment will include both some the interest on the borrowing and a proportion of the amount that you borrow. You will see the loan balance reduce year on year, to the point where the original loan should be repaid in full at the end of the term.

In this day and age, some lenders are beginning to insist that secured loans or mortgages are taken out on a ‘repayment’ basis, particularly if there is very little equity in your property.

However, if you do want to keep your monthly repayments as low as possible with the intention of paying off the secured loan with a lump sum in the future, interest only secured loans are still available and could be the answer for you.

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