How Interest Only Mortgages Work

Interest only mortgages are as the name suggests mortgages where only the interest is paid on the mortgage. You are only paying interest on the mortgage and not paying off any of the debt.

As you are only paying interest you will benefit from lower monthly repayments therefore they are beneficial to people in certain situations such as first time buyers looking to get themselves on the property ladder, those who possible stretched themselves a bit too far and borrowed too much during the boom years or if you are confident of a pay rise and want to take the opportunity to purchase a home you are after.

The downside to interest only mortgages are sooner or later you will have to repay the principal sum borrowed. Compared to a repayment mortgage where if you take a 25 year mortgage it will be guaranteed to be repaid after those twenty five years where as with an interest only mortgage you will be left with the whole debt left unless you have some kind of investment plan to repay the debt.

This type of mortgage gives you the option of investing the money in a tax efficient or tax free vehicle that may also turn out to grow faster than expected allowing you to repay your mortgage early. However there are no guarantees, the investment may not provide adequate returns to repay the mortgage on the planned date and you are carrying the high level of debt for the whole time period.

Interest only mortgages" are a great option to assist those in certain circumstances however the advice is only use them for a short amount of time as possible, soon as you can afford the repayment mortgage payments switch. If you were to borrow £100,000 over 25 years it would cost you in the region of £50,000 more to pay off the mortgage with the interest only method.

Choosing a mortgage is a huge decision so think about it carefully and talk it through with a partner and family before committing to the mortgage, better yet seek professional advice from a mortgage broker.

Olivia has written various articles about Interest only mortgages and has researched the subject thoroughly. She also enjoys writing various other topics