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What is an interest-only mortgage?
An interest-only mortgage involves only paying the interest each month, with the remaining amount due to be paid at the end of the mortgage term. Your mortgage payments are lower on an interest-only mortgage, because you are not repaying any of the capital balance. However please bear in mind you could pay back more over the term, as at the end of the mortgage term the original debt is still outstanding and must be repaid.
For example, a £100,000 mortgage at a rate of 5% over 25 years would cost £416.67 per month interest only, or £591.27 per month with a regular repayment plan.
Previously, interest-only mortgages were mainly combined with an endowment policy designed to pay off the mortgage debt by the end of the mortgage term. Unfortunately not all endowment polices matured with a sufficient value and left many borrowers with a shortfall to find on their mortgage. It is important to remember at the end of the mortgage term you will still need to repay the outstanding capital balance. It is still possible to take out an interest-only mortgage and use an investment vehicle, such as an ISA, to build up the amount needed to pay off the debt. However, many borrowers are wary of using risk-based investments to repay their mortgage.
People taking out interest-only mortgages without repaying any of the capital are taking a major risk if property prices fall, because their debt may be bigger than their home's value. Even if the value of their home rises the initial debt will not decrease and they will still need to pay off the capital part of the mortgage.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
We arrange mortgages from a panel of lenders and we will receive a commission from the lender upon completion. A broker fee of between £495 to £3995 is payable on completion and can be added to your mortgage. Mortgages available subject to status. The actual rate available will depend upon your circumstances.