Interest Only Mortgages

What Is An Interest Only Mortgage?

All mortgages are made up of two portions, the capital and the interest. The capital is the amount that you need to borrow, and the interest is the interest payment to the mortgage lender for lending you the capital. With an interest only mortgage all you repay to the mortgage lender over the term of the mortgage is the interest. But wait don't get too excited, that means that at the end of the term you still owe the capital on the mortgage i.e. the full amount that your home cost when you bought it.

What Benefits Do Interest Only Mortgages Offer?

Well the main benefit is that it may initially allow you to get onto the property ladder as the monthly payments are significantly lower than those of a repayment mortgage, remember though this comes at a cost, the cost being that you will need a way of paying off the capital to the mortgage lender at the end of the term.

The way you repay this could be by taking out an endowment, an ISA or even a pension plan, but again take care because if these perform badly then you could be left falling short of the amount you owe.

Interest only mortgages may also be a benefit to anybody looking to buy to let as it may well be that if you are assured regular rental income it will cover your mortgage payment and still leave you a little profit. Your house could then be sold close to the term of the mortgage to repay the capital and providing property prices have increased you will benefit from the increase in the property price (subject to relevant taxes of course).

What Are The Possible Downsides To Interest Only Mortgages?

If your investment plans or savings do not perform well, you may end up with not enough money to repay the capital owed to the mortgage lender. If you are using this as a way of getting onto the property ladder, then it may be advisable to convert to a repayment mortgage as soon as you can afford to do so.

If you are in any doubt about your mortgage it is always best to consult with an independent financial advisor before committing to the mortgage.