Interest Only Mortgage

An interest only mortgage is when the monthly payments cover just the interest on the mortgage while the capital borrowed remains unchanged.

It can be useful for some first time buyers to take out an interest only mortgage in the short term to enable them to keep mortgage payments low while setting up their home, switching to a repayment mortgage at a later date which would start reducing the capital bringing down the overall amount borrowed.

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Once an interest only mortgage has been chosen a long term view needs to be considered as to how the capital of that mortgage is going to be paid back at the end of the term.

This could include an investment plan, inheritance or selling the property in the future. An investment plan could come in the form of a pension, ISA or endowment. This investment doesn’t have to be provided by the lender.

Not repaying back the total amount borrowed at the end of the mortgage term could lead to your house being repossessed.

Other things to consider:

When thinking of taking out an interest only mortgage you need to be sure that it’s the right choice for you.

The interest only mortgage works on the principle that you borrow an amount from a lender and only pay the interest that is due on a monthly basis.

As only the interest is being paid on the mortgage your monthly repayments will be a lot lower than they would otherwise be.

Only paying the interest on a mortgage over the length of the term will still leave you with the amount borrowed still to pay.

When choosing an interest only mortgage having an additional investment or savings plan that you pay into on a monthly basis with the long term view of covering the amount borrowed would be a way of paying off the debt at the end of the term.

No investment is guaranteed. Even investing in another property has its risks. A fall in value of your property after a down turn in the market could leave you without the capital needed to pay back what you owe.

Not being able to pay off the capital at the end of the term weather due to an under performing investment or an unsuitable savings plan would leave you in a position were you would risk loosing your home.

This is the risk in taking out an interest only mortgage.

If in doubt talk to an independent financial advisor, make sure everything is explained to you so you don’t have any doubts when making your decision.

Deciding on the right mortgage is for most people the biggest financial decision they will make.

This service offers you access to a full range of mortgages and re-mortgage products (UK only).

Getting the right mortgage for you is essential. Making sure your repayments are competitively low and that you don’t pay over the odds for your mortgage is most important.

First time buyers and homeowners using Choice Mortgages should consider how much the product costs to arrange, any early repayment costs, the initial rate and the APR before making your final decision.

Please note if you do not keep up payments on your mortgage your house could be repossessed. Not all mortgages are regulated by the Financial Services Authority.