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What is an Interest Only Mortgage?
An Interest Only Mortgage is one where the repayments are made
up entirely of the interest on the loan. When the mortgage term
is complete, the capital originally borrowed is still
outstanding.
To cover the balance, borrowers are advised to make regular
contributions into an investment policy alongside their mortgage
repayments. This can be arranged by the mortgage provider, most
commonly in the form of an endowment mortgage, an ISA mortgage or
a pension mortgage.
With this type of mortgage, the mortgage lender is advancing
you money and asking you to do no more than pay the interest each
month. In other words you are merely servicing the debt, and the
amount outstanding on your mortgage will remain constant.
An interest only mortgage can be an excellent choice for some
borrowers, who have a valid use for a lower initial required
payment. The actual capital which is freed up to pay for your
property can be invested into a long term investment fund, which,
if invested carefully, ought to help pay off both your mortgage
earlier than expected, and may even be used to cover the cost of
your interest only mortgage payments.
With interest only mortgages, most borrowers take out some
kind of savings plan to ensure that at some time in the future
they will have enough money to pay off their mortgage and have
the satisfaction of knowing that the bricks and mortar belong to
them.
With an interest only mortgage, a borrower will invariably
take out an endowment policy, a pension, or an ISA. In addition,
it is always good practice to arrange adequate life cover to
ensure that should the mortgage payer die the loan will be repaid
in full.
With a repayment mortgage, you make monthly payments on the
borrowed capital as well as the interest. With interest-only,
however, your payments are made up of the interest alone, and you
do not repay any of the capital until the mortgage term is
complete. Because you are only paying back the interest on the
loan, you will pay less each month than you would with a
repayment mortgage.
If you do choose an interest only mortgage, you need to make
sure that you know from the outset how you intend eventually to
pay off your mortgage loan.
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.
Your home may be repossessed if you do not keep up repayments
on your mortgage.
You may freely reprint this article provided the author's
biography remains intact:
About The Author
John Mussi is the founder of Direct Online Loans who help UK
homeowners find the best available loans via the http://www.directonlineloans.co.uk
website.
 MORE RESOURCES updated Thu. February / 09 / 2012
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