An interest only mortgage means that you only repay the interest on the loan given by the mortgage lender. Therefore, the actual loan (the money that you paid for the property) is not being paid off – only the lender’s interest charges for giving you the money. With an interest only mortgage you agree to pay off the interest charges, but none of the principle sum. The principle is the total amount you owe on the loan. Typically an interest only mortgage is offered fairly short term with a balloon payment at the end of the mortgage. You can however set up the interest only mortgage to be a part and part mortgage. This mortgage allows for part of the loan to be interest only and the other part as normal repayment. This means you would have no interest on the repayment part of the loan.
Sounds great doesn’t it?! But remember that if you opt for interest only, that large capital amount will still be outstanding at the end of the term and those low monthly payments may not then seem to have been such a good idea. The best option will be to switch, as soon as you can afford to make full repayments, back to a normal mortgage. Some companies will allow this to be done without a further charge but be careful as some won’t. In the present state of the mortgage market such loans as this may no longer be as easy to find as they once were.
It is ideal for those who would struggle to pay off both the loan itself and the interest. This type of mortgage is usually setup by first time buyers, where, initially, finances are stretched.
The best way to deal with an interest only mortgage is to setup an additional investment plan that will, by the end of your mortgage term, enable you to pay off the actual mortgage loan. That would be the main aim. It may be that you choose an ISA, pension, or endowment mortgage as the investment type. Whatever investment you choose, always look into the tax benefits that it offers and weigh up exactly what you can afford in terms of additional monthly payment. It is highly advisable that an investment plan is put in place.
It may be that someone will take out an interest only mortgage with a view that their property will increase in value over a certain period. While this is possible, it is still advisable that an additional investment is still setup.
If an interest only mortgage sounds like an option for you then you can use an online mortgage calculator to determine the affordability of such a loan. The mortgage calculator allows you to view your monthly payment based on the information you input. In this case you would need to enter into the mortgage calculator that you are obtaining an interest only loan. The mortgage calculator would then be able to calculate just the interest payment you would need to make.
