Interest Only Mortgages

An interest only type mortgage is when the borrowers’ regular monthly payments only actually repay the interest on their mortgage loan. They will also need to actually invest extra money into an ISA account in order to repay the capital balance when the mortgage term has finished.

A mortgage that is interest only basically means that the borrowers’ monthly payment amounts will only cover the interest charged on the mortgage loan. They will not actually repay any of the mortgage amount that they have borrowed. For example if the borrower has obtained a mortgage for £125000 for 25 years at a rate of interest of 5.86%, then after the 25 year mortgage term the borrower will have repaid the interest charges and will still owe £125000. The borrower will therefore need to ensure that they have a lump sum of money available so that they are able to repay their mortgage back when this time arises.

These mortgages will remain the same through the whole term of the mortgage. The Interest as well as the money paid to an investment scheme such as an ISA is paid each month by the borrower. When the mortgage term has finished, the money that has been invested is used to repay the capital amount owed on the mortgage. The amount that is invested will actually depend on the growth of the interest rate against the money invested. For example if interest rates rise significantly, then the interest on the borrowers’ savings will also increase significantly enabling their savings to increase. As well as this however, the interest rate could decline dramatically meaning that their savings could decrease also. If this is the case, then the borrower may not have enough money in their investments to repay the capital on their mortgage.

Therefore, if the borrower decides on choosing an interest-only mortgage they will be responsible for making sure that they have enough money available to enable them to repay their mortgage when its term is complete.

With these forms of mortgage the borrower will only pay the actual interest accrued against the mortgage every month. It is normal for the mortgage borrower to actually obtain a savings account or an investment plan at the time of applying for their mortgage. These investment plans could either be an ISA or a Pension plan.

The borrower should make sure that they have made arrangements to repay their mortgage loan at the time of its expiry date. If they do not do this, they may lose their home.

One of the main advantages of these interest only mortgages is that initially the borrower will only repay their interest meaning that their monthly payment amounts will be a lot lower than if they had a repayment mortgage as they would then have to repay both the capital and interest at the same time.

If their savings investment does not supply them with a high enough return, they will not have the sufficient funds to be able to repay the capital amount that they owe. It is therefore, vital that the borrower obtains the right type of qualified advice prior to them purchasing an interest only mortgage. They must then always ensure that they keep an eye on their investment progress regularly.

They must also be aware that the interest rates they receive with an interest only mortgage could not be as good as those that they would receive with a repayment mortgage.

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These types of mortgages are better suited to those individuals who are considering selling their home prior to the end of the mortgage term and then pay the rest of the capital owed by using the sale proceeds. If the borrower is an investor in the buy to let category, purchasing the property for the purpose of a second home, or they are even planning on purchasing a smaller or cheaper property then it is seriously worth them considering in obtaining an interest-only mortgage.

If the borrowers’ earnings are at a low at the present time, but they are expecting them to rise considerably in the future, once they are fully-qualified or have had extra training, then an interest-only mortgage could be a wise option for the first few years before they change to a repayment mortgage.