Interest Only Mortgage

MORTGAGE FOX - LAST UPDATED 14 AUGUST

Mortgage Fox – Smart, independent, unbiased advice on UK mortgages and home buying.

Interest Only Mortgage

An Interest Only Mortgage is where your monthly repayments to your mortgage lender only repay the interest that is being charged on your mortgage loan.

However with a Repayment mortgage the amount that you repay each month will reduce both the interest and the capital that you borrowed.
With an interest only mortgage the loan is re-paid in 2 separate parts.- the loan and the interest. The interest is re-paid but none of the actual loan is re-paid until the end of the mortgage term. It is therefore very important that money has been set aside to repay the original loan.

An Interest Only Mortgage will cost you less--- So you can borrow more.

If finances are a problem but you are keen to get on the property ladder an interest only mortgage may seem like a good idea.You must make sure that you understand the risks involved and have a clear plan as to how you will pay off your loan at the end of the mortgage term
On a  £100,000 interest only morgtage, you can cut your annual payments by around £2,000.But your capital debt will still be outstanding at the end of your 25 year mortgage period.You will only have paid the interest off.
Do  not rely on an increase in the price of your property to pay off the capital debt at the end of the mortgage term..Anyone who takes out an interest only mortgae without repaying capital is taking a huge risk if property prices fall.Your debt will be bigger tha the value of your home..
It is imperative that provision is put money into a savings scheme or an ISA each month.This will build up into a lump sum which will enable you to pay off your loan at the end of the mortgage term.
 We would suggest that you consult an Independent Financial Advisor.

With Profit Endowment Policies
Regulatory requirements were lifted some time ago that stated if a borrower had an interest only mortgage the bank must make sure that a saving scheme was set up by the borrower.
Previously interest-only mortgages were usually combined with an endowment policy designed to pay off the mortgage.
Interest-only mortgages were very popular during the 1980s when they were taken out with a with profit endowment policy. This also included life insurance cover.
Unfortunately many homeowners believed that the endowment would not only pay off the mortgage but provide a lump sum, too. Many of the funds failed to deliver a profit due to poor management and there was a huge mis-selling scandal after which the endowment policy lost much of its popularity.

Should I consider an Interest Only Mortgage?
High prices in the South of the country mean that sometimes an interest-only mortgage can be cheaper than renting. You may not be paying off the capital but you are on the property ladder.  You should switch to a repayment mortgage as soon as possible. You must remember if prices fall you could face repossession. Borrowers who never pay off their debt are just renting from the bank or building society. .
It is possible to switch to a part re-payment and part interest only mortgage so that some of the capital is repaid.

Pros and Cons of an Interest Only Mortgage 
They are cheaper initially—They get you onto the property ladder.
If prices fall you could lose your home. -- They can be a gamble
Our Mortgage Advisors here at Mortgage Fox will be able to advise you on all aspects of Interest Only Mortgages. Click here