What is an Interest Only Mortgage
What is an Interest Only Mortgage
Interest Only Mortgage Advice
So, what is an interest only mortgage? Often mistakenly called an endowment mortgage, interest only mortgages are loans where the lender agrees to charge purely interest throughout the term of the mortgage. You are not actually reducing the loan itself. This is why it’s very important you arrange some other way to repay the loan at the end of the term, for example through an investment or savings plan.
The capital amount is to be repaid at the end of the period agreed. Normally a lender will ask you to establish a repayment vehicle for the loan at the outset although this is not always the case. Each month therefore you may make two separate payments, one to the lender and one to the investment you may have selected to repay the loan. The current options available to you in conjunction with interest only mortgages may include endowment, pension or an Individual Savings Account (ISA)
There are a variety of investment vehicles available to use to repay interest only mortgages, some offering tax advantages. The investment vehicle is entirely portable and can be taken with you to a new lender no matter how many times you might move. It is possible that your investment may provide a surplus lump sum or pay off your mortgage early. If you choose this option you will need to check that your investment or savings plan is on track to pay off the loan at the end of the term. If it doesn’t grow as planned, you will have a shortfall and you’ll need to think about ways of making this up
The amount of your debt does not decrease over time, unlike the repayment mortgage option. There can be a shortfall in the fund within your investment meaning the cost of your interest only mortgage may increase over the term or alternatively you may be left with an extra sum of money to find at the end of the loan. There is no guarantee with this type of mortgage.
If you’re thinking about relying on a rise in your property’s value, be aware that property prices can fall, and property can take a long time to sell when prices are falling, so you may find it hard to minimise a heavy fall in price
The pros:
Because you’re only paying off the interest, and not the loan itself, your monthly payments will be lower.
The cons:
That debt is not going to go away. Throughout the life of the mortgage, you’ll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can’t repay it at the end of the term you could lose your home. If you’re relying on a rise in your property’s value, there is no guarantee it will be enough to repay the loan.
Categories: Interest Only Mortgages, Mortgages Tags: interest only, mortgage