Friday, February 24, 2006

What is an Interest Only Mortgage?

An interest only mortgage is where you pay only the interest on the loan. You do not pay off any of the amount owed (the capital)

With the more traditional repayment mortgage you pay off the amount owed at the same time.

Interest only mortgages are cheaper than repayment ones. However you are supposed to have some kind of investment vehicle (an ISA or pension, previously an endowment) into which you pay money and at the end of the mortgage term this pays of the original amount borrowed.

If the investment vehicle does not accumulate enough to pay off the loan there is a shortfall. This is what has happened with many endowment mortgages. You have to make up the shortfall.

Some first time buyers are talked into getting an Interest Only mortgage as a way of getting on the property ladder. The problem is they are not putting money aside in an investment. Plus they are not accumulating any equity in the property.

Not recommended for most people.

No comments: