Repayment Options
Interest Only mortgages
| Advantages
| Disadvantages
With an interest-only mortgage, your monthly repayments
to the lender consist only of interest on the total loan
amount. The interest payments will vary depending on the
interest rate being charged by the lender at the time. This
type of mortgage involves paying the lowest possible monthly
outlay to the lender, as no capital is included in the repayment.
Instead of repaying the capital, regular payments are put
aside in a suitable investment or savings plan. This grows
cumulatively and assumptions are made regarding its growth
in order to calculate a monthly payment figure. If you are
fortunate, the investment will accumulate at a higher rate
than is required to pay back your loan on time, resulting
in a cash surplus at the end of the term.
This is not always the case however, and sometimes the
investment can under perform instead. This means you will
have to increase or supplement your monthly payments to
avoid facing a cash deficit at the end of the term. The
lender will usually wish to see evidence that suitable arrangements
have been made that will enable the borrower to repay the
loan at the end of the term.
There are three main types of investment vehicle that a
lender will usually permit to be associated with an interest-only
mortgage:
It is a good idea to check your investment regularly to
ensure that you are on course to generate sufficient to
repay the loan at the end of the term. If your investment
falls behind and it does not look like there will be enough
funds on time, it may be possible to make additional contributions
to get it back on track.
Some mortgage lenders do not require you to define a fixed
term for repaying the loan. You either pay it back once
your savings or investment scheme has accumulated enough
money, or when you die, in which case the loan will usually
be paid off by a separate or integrated life assurance policy,
depending on the investment vehicle used. A small number
of lenders also allow you to borrow money with no investment
vehicle in place. This is called a standing mortgage.
