Guide to Interest Only Mortgages
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Here is a useful guide to interest only mortgages. An interest only mortgage is one where your regular payments only go to pay off the interest on the money you borrow. You will invest to pay off the capital sum at the end of the mortgage term.
An interest only mortgage means your monthly payments cover only the interest on the loan. They do not pay off the amount you owe. So, at the end of the mortgage term, assuming you have made all the interest payments, you will owe the same amount that you borrowed at the beginning. You need to have a lump sum available to pay the mortgage back in one go at this time.
An interest only mortgage stays the same throughout the mortgage term. Interest and a premium to an investment scheme are paid monthly. At the end of the term, the proceeds from the investment vehicle are intended to repay the mortgage. The amount will depend on the performance of the investment scheme. If you choose an interest-only mortgage you are responsible for ensuring that you have sufficient funds available to repay your mortgage at the end of the term.
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With this type of mortgage you only pay the interest accrued on the mortgage each month. It is usual for the borrower to take out a savings or investment plan at the same time as applying for the mortgage; this could be an ISA, Pension or Endowment plan.
Endowment policies used to be a popular way to build up funds to repay the capital of interest-only mortgages. However, some people have found these policies haven’t built up enough money to pay off the full mortgage amount at the end of the mortgage term.
Make sure you make arrangements to pay off the loan when the mortgage ends. If you don’t, you could lose your home.
The main advantage to an interest only mortgage is initially seen in the payments you make to your lender. The fact that you will only be repaying your interest here means that your monthly payments will be much lower than they would be for a repayment product.
If your investment does not give you good enough returns, you won’t have enough money to repay the capital owed. So, it’s vital to take good and qualified advice before buying an interest only product and then to track your investment progress on a regular basis.
You also need to consider the fact that the rates you get for an interest only mortgage may not be as favourable as those on offer for repayment mortgages.
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