Interest Only Mortgages: Ten Things You Really Need To Be Aware Of

1. Having an interest only mortgage will mean that you only pay the interest that has accrued on your home loan every month, instead of a classic repayment mortgage where you repay a portion of the actual capital each month together with the interest to ensure that at the end of the term you will have repaid your mortgage wholly.

2. The entire capital amount (i.e. the price you paid for your home) is still outstanding at the end of an interest only mortgage term therefore it has to be paid for by some other method.

3. For this particular reason interest only mortgages were in the past always offered alongside another product, such as an endowment policy, which is a product that you pay into every month and which then invests that cash in the stock market. Hopefully, when your home loan has reached its end, your endowment policy will end up being worth enough to take care of the outstanding capital that you have to repay.

4. In the event that you cannot manage to make the higher monthly payments of a repayment mortgage an interest only mortgages can be a very good way to get you on to the property ladder. Then, when are a little bit more financially secure you can change to a repayment mortgage and begin reducing the debt.

5. In areas where property prices tend to be high, interest only mortgages are worth taking into consideration because they may in fact turn out to be cheaper than renting.  However, you should always try to either change to a repayment mortgage when you can or make sure you have some other strategy for repaying the capital at the end.

6. Interest only mortgages are also a great opportunity for people who are self-employed or who have irregular pay. In these cases the flexibility that comes along with an interest only mortgage can be very acceptable.

7. Some loan companies are now offering the option of getting a part interest-only and part repayment mortgage. This enables you to gradually cut down the interest only portion.

8. Interest only mortgages find favour with buy to let investors as the interest payments are tax-deductible. They do not intend to actually live in the property, but, expect to gain from it either through an increase in its value or by receiving rent over and above the interest payments and any other expenses.

9. As you don’t repay any of the capital during the course of the mortgage, an interest only mortgage will cost you much more in the end as you are having to pay interest on the whole amount for the entire time. With a repayment mortgage your monthly payments are composed of a lot of interest and a little capital repayment at the beginning but the equilibrium gradually changes until you are mostly repaying capital with not very much interest.

10. Lenders may ask for larger deposits as they think interest only mortgages are more risky than repayment ones. Also, they may charge a higher interest rate on interest only mortgages.