Interest Only Mortgage
Mortgage options
As the title implies this type of mortgage means that only the interest is repaid over the term and the capital is paid off by an insurance policy which you pay the premiums every month and should realise the capital amount to settle the amount borrowed.
The upside of an Interest Only loan is that the monthly premiums are considerably lower than a repayment mortgage. The downside is that after you have paid off the interest on the loan you still owe the capital amount.
The worst case scenario on an interest only mortgage is if you are unable to repay the mortgage lender the capital sum they are perfectly within their rights to start proceedings to repossess your home.
That is why it is crucial to maintain payments on an endowments policy or other suitable policy to mature at the same time as the term to pay off the capital amount in full for you.
Unless you are certain of a substantial inheritance or other windfall there are only several other ways to have a policy to mature at the termination of the loan to pay off the capital borrowed
An endowment policy: This type of investment based policy is recognised as being very risky as their maturement value is greatly affected by the stock market and these should be avoided.
A pension plan: This is technically possible to use the cash from a pension plan to clear the debt but this is not a particularly good idea
An ISA: An ISA stands for Individual Savings Account which is a Tax Free investment and is generally seen to be the most appropriate option to take.
As you are entering a mortgage which is interest only you must be sure you take good advice to ensure you have considered the options to have a capital lump sum to settle the mortgage amount. It is not good to simply leave it till later in a hope that something will turn up as you are risking your home.
Whatever type of repayment method you go for it involves making a substantial long term financial commitment and you need to seek advice of an Independent financial advisor who specialises in investment advice for interest only mortgages before you commit to your lender.
A Word of Warning
If you choose to opt for an interest only mortgage you are accepting a substantial risk with your mortgage. You have to be confident that the method of settling the capital amount is comfortably going to achieve this in 20, 25 years time. If your method of repayment does not perform as well as intended you could be left with a substantial shortfall and insufficient cash to pay off your loan.
If you’re the worrying type then maybe you should opt for a repayment mortgage if you can afford to make the payments, and it pays to take advice before you commit.
