Mortgage Information - Interest Only

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Interest Only

With interest only mortgages the loan is not paid off during the mortgage term, but instead just the interest is paid to the lender and the original amount borrowed needs to be paid at the due date of the loan term. Generally the mortgage holder will also be paying into an investment that has the potential to build up a lump sum, which is then used to pay off the mortgage at the end of the term.

At present there are many types of interest only mortgages on offer these include the ISA mortgages (formerly PEP), Pension mortgages and the previously most common type, the endowment mortgages.

Effectively there is a gamble with investments, grown sufficiently the savings should have built up to a value to pay off the loan and may even provide a surplus over and above the loan amount. In addition you may have saved money during their mortgage term by paying out less each month than with a repayment mortgage. However, in recent years investment returns have been lower than expected and therefore you could face a shortfall when you come to pay off your mortgage, or you could have to pay more each month than with a repayment mortgage.

The risk associated to interest only mortgages depends heavily on the type of investment to which they are linked, though they do not need to be linked to an investment. Various lenders allow you to decide on how you will repay the money at the end of the term. This may be appropriate in circumstances where you have substantial investments that can be used eventually to repay the loan. Or you may receive a future inheritance that will provide you with enough money to repay the loan.

• Endowment Mortgages
• ISA
• Pensions

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