An Interest Only Mortgage is one where
repayments are made up entirely of interest on loan. When mortgage term is complete, capital originally borrowed is still outstanding. To cover balance, borrowers are advised to make regular contributions into an investment policy alongside their mortgage repayments. This can be arranged by mortgage provider, most commonly in form of an endowment mortgage, an ISA mortgage or a pension mortgage.
With this type of mortgage, mortgage lender is advancing you money and asking you to do no more than pay interest each month. In other words you are merely servicing debt, and amount outstanding on your mortgage will remain constant.
An interest only mortgage can be an excellent choice for some borrowers, who have a valid use for a lower initial required payment. The actual capital which is freed up to pay for your property can be invested into a long term investment fund, which, if invested carefully, ought to help pay off both your mortgage earlier than expected, and may even be used to cover cost of your interest only mortgage payments.
With interest only mortgages, most borrowers take out some kind of savings plan to ensure that at some time in future they will have enough money to pay off their mortgage and have satisfaction of knowing that bricks and mortar belong to them.
With an interest only mortgage, a borrower will invariably take out an endowment policy, a pension, or an ISA. In addition, it is always good practice to arrange adequate life cover to ensure that should mortgage payer die loan will be repaid in full.
