As the name suggests, with an Interest-only mortgage, the monthly payment includes only this element of the debt.
The upside of this is that the monthly cost is considerably lower than for a comparable repayment mortgage.
The downside is that at the end of the mortgage term you still owe the original amount you borrowed.
And if you can’t repay it, your mortgage lender is perfectly entitled to repossess your home.
That’s why, if you go for this option, you need to organise a way to repay the capital debt.
Unless you can be certain of a sizeable inheritance or other windfall, this means saving as you go along.
There are several ways to do this.
Repayment vehicles for the capital debt
• An endowment: This is a stock market-based investment plan. These are now recognised to be very risky and, therefore, should be avoided.
• A pension plan: It’s also technically possible to use cash from a pension plan to clear the debt, but this is also a very bad idea.
• An Isa: Isa stands for individual savings account and this is a type of tax-free investment. It’s generally considered to be the best repayment option.
To learn more about these, see The Isa mortgage.
Get impartial advice
Whatever repayment vehicle you go for, it involves making a substantial, long-term financial commitment.
that’s why it’s essential to discuss your options with an independent financial adviser who specialises in investment before making your choice.
A word of warning
Opting for an interest-only mortgage involves accepting a significant degree of risk.
If your repayment vehicle doesn’t perform well, you could be left without enough cash to clear your debt.
If worrying about this will keep you awake at night, choose a repayment mortgage instead.
And another thing
The majority of mortgage providers no longer ask for proof that you have set up a suitable savings or investment plan before agreeing to an interest-only mortgage.
But don’t let this tempt you into going without one if you don’t have enough money put aside when the time comes to repay your lender, you could lose your home.
Read More about Interest Only Mortgages
- Should I choose repayment or interest-only?
- How to change from an interest-only to a repayment mortgage.
- The true cost of an interest-only mortgage
- How to decide if you should get interest only
- Best Buy Tables for Interest Only Mortgages UK
- Frequently asked / common questions about interest-only mortgages