Interest Only Mortgage

26-Jul-2008

With an interest-only mortgage, you would repay the actual loan in a lump sum after an agreed length of time (the mortgage 'term'), and only pay back the interest in the meantime. 

If you are considering an interest only mortgage, you need to bear in mind that this type of mortgage is an extremely risky proposition, because although it may cost you less each month in repayments, you need to be certain that you will have a large lump sum of cash available at the end of the mortgage term with which to pay back the loan. 

Unless you have a highly paid job or substantial bonuses and are therefore confident that you will have access to sufficient funds, you should take out an interest only mortgage in conjunction with an investment or savings plan that is likely to provide you with a good return.  Unfortunately you are introducing an added element of risk into the proceedings since the best investment yields come from higher-risk schemes. 

How can I get the best interest only mortgage deal?

Some of the best interest only mortgage deals are tied into Endowments, ISAs, and Pension schemes.  In Endowment Mortgages, you pay interest on the amount owed to your mortgage lender, while at the same time investing a sum of money with an insurance company in an endowment policy.

The interest on your endowment policy grows throughout the term of your mortgage into a sum to pay off your outstanding capital debt at the end of the mortgage period. After paying off your capital, you may be left with an extra lump sum of money to be used as you see fit. However, at the end of the term, there is a possibility that your investment will fall short of the amount needed to pay off your mortgage debt.

An ISA (Individual Savings Account) is a good option when you want tax benefits as interest on this type of savings account is tax-free. Depending on market conditions, if the plan performs well you could be left with a considerable surplus amount after the mortgage has been repaid. Also, you will have the option to repay your loan early, once enough money has amassed in the account to pay off the capital debt.

A pension plan for an interest only mortgage has potential for greater returns, and it  also has built in tax benefits for you. Since it is designed to provide you with income for after you retire, only a part of your total investment is eligible to be tax free.  Click on the link to find out more about pensions.

You should carefully consider your options before proceeding with an interest only mortgage, because your house could be repossessed if you are unable to pay back the money that you have borrowed.  Therefore, we would strongly advise speaking to a qualified mortgage adviser about the best options for your financial circumstances.  Simply fill out the short form on one of our mortgage pages, and we will connect you to an experienced adviser from the SimplyFinance network.