Category: Mortgages

What is an Interest Only Mortgage?

You may have heard of an interest only mortgage but not be too sure what it is. If you are thinking of getting a mortgage or remortgaging then it is really important to have a good understanding of this. This is because you will be able to then make sure that you make the right choice with regards to the mortgage that you choose.

The Basics

It is quite simple really in that an interest only mortgage means that you will only have to repay the interest. Of course, you will eventually have to repay what you owe in full, but each month, you will only have to pay interest to the lender. Then when the mortgage period is up – perhaps after twenty five years, you will then repay all of the money that you borrowed in one lump sum. This might sound a bit odd, but the idea is that you invest some money each month and hope that it will increase en value so that by the end of the mortgage term, you have enough to pay for the house. This will mean that you will owe the full amount that you borrowed right until the end of the mortgage term and so you will be charged interest on that full amount all the time. If you have a repayment mortgage, which is the other alternative, you will repay some of what you owe each month as well as paying the interest and this will mean that the interest amount you have to pay will go down as you pay off more and more of what you owe. This could mean that you will end paying a lower amount of interest over the twenty five years if you get a repayment mortgage. However, the interest rates for these two types of mortgages may not be the same. Also, when you are investing money, you will be getting a return on that. It may not be a monthly return but the investment should grow in value which means you could end up paying out more money compared with the repayment mortgage. It can be very complex to calculate and you will have to make some estimations and forecasts with regards to how the investment value will change as well as interest rates. It can be wise to have a financial advisor to help you.

Who do They Suit?

These can be good for those people that would rather invest money and try to make more money than they need compared to those that would rather be sure that they have definitely repaid everything. If you are willing to take a risk then you could find that you will be able to cope with this type of mortgage, but if you are likely to get anxious and worry that you will not have enough money to repay it, then it could be a lot better to go for the repayment. You will need to keep checking your investment to make sure that it will be enough to repay the mortgage when necessary.

 However, you need to be very careful to make sure that if you do go for an interest only mortgage that you are confident that you will invest enough to repay it. It can be tempting to not do so, if you get short of money and assume that you can make it up later and you could end up not having enough. With the repayment you will have little choice but to make the payments. Therefore, if you are not self-disciplined then it could be better to go for a repayment.