What is an interest-only mortgage?
Each month you will repay interest on the amount borrowed, but at the end of your term you need to be able to pay off the remaining capital. This may be achieved by taking out an Endowment, Pension or ISA, which should provide you with the amount you need at the end of your mortgage term. You must be aware that the value of investments plans can go down as well as up and are not guaranteed upon maturity. This makes an interest-only mortgage a more risky option than a repayment mortgage.
An interest only mortgage is a mortgage where you pay only the interest payments (either for a number of years, or for the term of the mortgage). Therefore, when you are on the interest only mortgage, the amount you have borrowed will remain constant – as you are paying nothing off the mortgage amount. It may not be suitable for everyone. It has become popular with some property investors (as a measure to keep the mortgage repayments low, with the view that rent may raise in the future.. It can also be useful for first time buyers to keep their repayments low in the first year (or couple of years), when there are a lot of costs, such as furnishing the home, decorating etc. With most lenders, who offer interest only options, you can swap over to a standard repayment mortgage at a later stage, without much hassle.
