Interest Only Mortgage

What is an Interest Only Mortgage?

An interest only mortgage is different to a repayment mortgage. Basically, you borrow the money to purchase your home, and simply pay back only the interest on the loan during the term of the mortgage.

On the face of it, an interest only mortgage will be cheaper than a repayment mortgage, since only the interest will be charged to you. However, at the end of the period of the loan, you will have to pay back the interest only mortgage.

You should therefore seek to save or invest enough money to be able to pay off the interest only mortgage at the end of the term. The common ways to do this are:

• Endowment mortgage
• ISA Mortgage
• Pension Mortgage
• Other savings vehicles

In essence you can use any savings vehicle that you feel will generate enough cash at the end of the term.

What are the attractions of an interest only mortgage?

An interest only mortgage allows you more control since you can decide where to invest your money. You could also have the potential to get back more than you actually need to pay off the interest only mortgage. You could therefore have a surplus to spend, or even pay off your mortgage early.

Also, with an interest only mortgage, if you move home, you can keep the savings pot going, and transport this to your new mortgage. If you choose a repayment mortgage, you may have mainly paid off interest during the first few years of the mortgage, and the balance may not have reduced by much.

What are the risks of an interest only mortgage?

With an interest only mortgage you are responsible for paying back the money borrowed at the end of the term. You could therefore find that your saving vehicle has actually yielded less than you expected, and have a shortfall. This is the case with many people that took out endowment mortgages in the past. Because they invested in the stock market, and this performed badly, they are now in a position where they need to put in extra money to ensure they remain on target to repay the interest only mortgage. Obviously an interest only mortgage is riskier than a repayment mortgage, but the rewards can be greater.

You should also consider the cost of protecting your mortgage.

With all these issues, it pays to get proper advice from a professional. Contact us here to discuss an interest only mortgage.

Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.