Interest Only Mortgages

The Basics

Often mistakenly called an endowment mortgage, an interest only mortgage is a loan where the lender agrees to charge purely interest throughout the term of the mortgage. The capital amount is to be repaid at the end of the period agreed. Normally a lender will ask you to establish a repayment vehicle for the loan at the outset although this is not always the case. Each month therefore you make two separate payments, one to the lender and one to the investment you have selected to repay the loan. The current options available to you in conjunction with this type of mortgage include endowment, pension or an Individual Savings Account (ISA)

Advantages

There are a variety of investment vehicles available to use to repay the mortgage, some offering tax advantages. The investment vehicle is entirely portable and can be taken with you to a new lender no matter how many times you might move. It is possible that your investment may provide a surplus lump sum or pay off your mortgage early.

Disadvantages

The amount of your debt does not decrease over time, unlike the repayment mortgage option. There can be a shortfall in the fund within your investment meaning the cost of your mortgage may increase over the term or alternatively you may be left with an extra sum of money to find at the end of the loan. There is no guarantee with this type of mortgage.

Suitability

The interest only mortgage option is suitable in a number of circumstances the most common being those identified below:

• You do not mind taking some degree of financial risk



• The period of borrowing is in excess of say 12 years.



• You believe that the investment market over the period of your mortgage is likely to generate a cash surplus over and above that required to repay the mortgage.