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Interest Only Mortgage

If the repayments on a regular mortgage seem to dwarf what you estimate you can afford on a monthly basis you may be interested in the structure of an interest only mortgage. An interest only mortgage is where repayments are made to cover entirely the interest on the loan, not the loan itself. When the mortgage period is complete, the funds originally borrowed are still outstanding. To cover the balance, borrowers taking out an interest only mortgage are advised to contribute regular payments into an investment policy flanking their mortgage repayments. The mortgage provider can set up this arrangement, most frequently under the structure of an ISA mortgage, an endowment mortgage, or a pension mortgage.

Variations from a repayment mortgage

Were as with a repayment mortgage, you make monthly payments on the borrowed money as well as the interest, with an interest-only mortgage, your payments are made up of the interest only, and you do not repay any of the actual loan sum until the mortgage term is complete.
Because you are only paying back the interest amount on the loan, you will pay a lower figure each month than you would with a repayment mortgage.
Some interest-only mortgages will insist on a given form of investment, such as ISA mortgages or endowment mortgages. Whatever vehicle you choose to use, though, there is an element of risk involved, as the appropriate investment vehicles are almost always linked to the ever-varying domain of the stock market. When the loan term ends, you still owe the mortgage lender the amount you borrowed at the start of the mortgage. With endowment mortgages, the amount you invest is set from the start at such a level that it should cover the cost at the end, but only if it performs the way the policy provider projects. If your savings or investments do not cover this debt, you face the possibility of having you’re home repossessed.

Is an interest only mortgage right for you?

If you are unsure whether or not to opt for an interest-only mortgage, begin by asking yourself the following questions:

1. Does taking out long-term investments interest you?

2. Do you feel comfortable taking financial risks?

3. Are you in full confidence that you shall be able to pay all your mortgage repayments on time and in full?

4. Would you be in the position to employ other financial reserves should there be an underperformance at the close of your main policy?

If you find yourself answering yes to all of the above, then an interest only mortgage could well be suitable for your circumstances. If, however, you answered no to any of the above questions relating to interest-only mortgages, or were unsure what your feelings were towards some of the questions, then you may find that a straightforward repayment mortgage will be better suited to you. Check out our Fixed rate mortgage or First time buyer pages, if you are in any doubt about which to choose.