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Interest only MortgageAn interest only mortgage is a mortgage that is taken out to simply pay the interest from the loan and nothing from the capital. Whereas a capital repayment mortgage is taken out in order to pay both interest and capital from the mortgage.Interest only mortgages are largely used alongside an investment plan. This way a regular monthly payment is made in order to pay off the interest from the loan, alongside regular separate payments to an investment plan. Therefore, when the mortgage matures, there is a separate amount of money available to repay the full capital from the mortgage. This type of mortgage is referred to as an investment-backed mortgage, an endowment mortgage in the case of an endowment policy being used, and in the same trend (related to the type of plan used), a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. These types of mortgages used to provide great tax advantages however nowadays they do not. They are also classed as higher risk mortgages as you are effectively gambling on the hope that the investment is enough to clear the mortgage. Another gamble used by interest only mortgage borrowers is that the property market will increase enough in order for the mortgage to be paid back. On this basis, mortgage lenders will provide interest only mortgages if they feel that the area with which you buy, is projected to have a sufficient enough house price rise. |
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