Interest Only Mortgage

What is an Interest only mortgage?

Unlike a repayment mortgage in which the monthly repayments cover both the capital sum borrowed and the interest on that sum, it should come as no surprise that monthly repayments on an interest only mortgage cover just the interest on the loan. However as you are only paying off the interest each month you will need to come up with some strategy to ensure that the capital sum involved in your interest only mortgage is also paid off.

There are several ways in which this can be achieved and some people take out investment plans, rely on inheriting significant capital sums in the future or even just rely on reselling the property once the mortgage term is completed and if the property has increased in value significantly this can leave them with a considerable amount.

Benefits to an interest only mortgage

One of the main advantages to an interest only mortgage is that compared with a repayment mortgage initial monthly payments can be considerably lower and for first time buyers it can mean the difference between being able to afford to buy a home or not. With an interest only mortgage it’s also possible to change the mortgage to a repayment mortgage later and this means that the problem of paying off the capital sum is also solved. This option is often taken out by first time buyers. Also with an interest only mortgage you have the flexibility to arrange the most tax efficient way of ensuring the capital sum is paid off.



Disadvantages to an interest only mortgage

One of the main disadvantages to an interest only mortgage is that there is no guarantee that the investment ‘vehicle’ that you have chosen to pay off the capital sum will be sufficient and you will need to think carefully about how you are going to pay of the capital. Also during the term of the mortgage the capital owed remains the same unlike a repayment mortgage where it will be reduced each month, though if inflation rises then capital sum you owe at the end of the your interest only mortgage will be considerably less in real terms than it was at the start.

Summary

An Interest only mortgage can be of great benefit to first time buyers as the lower monthly repayments can bring an otherwise unaffordable property within their reach, though it’s very important that careful consideration is taken when planning how to pay off the capital sum. If you have any queries about interest only loans or any other mortgage types then fill out the online form and one of our professional mortgage brokers will get in touch to discuss your mortgage needs.

 

 

 


 

Commercial Mortgages and Buy to let mortgages are not typically regulated by the FSA

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

We do not charge a fee for mortgage advice. A fee based option is available of typically 2% of the mortgage amount.
For example on a loan of £25,000 the fee would be £500



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