Information on the different types of interest only mortgages, when they're likely to be suitable and possible disadvantages.
An interest only mortgage requires you to make monthly payments to the mortgage lender in order to pay off the interest on the amount borrowed. In addition to the interest only mortgage you need to establish a separate long term investment plan that will accumulate enough funds to pay off the full loan amount at the end of the repayment period.
The investment plan required to pay off the mortgage usually comes in one of three forms; an ISA (individual savings plan), a pension or an endowment. This investment does not have to be provided by the mortgage lender.
Advantages
- You can choose an 'investment vehicle' that is tax efficient.
- If the investment growth rate exceeds those estimated at outset you may be able to pay off your mortgage early or enjoy a lump sum at the end of the repayment period, in addition to paying off your mortgage.
Disadvantages
- You have no guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the investment could perform below that assumed at the start. (By monitoring your investment's performance you could make additional contributions during the repayment period if you felt the fund was under performing.)
- Some forms of investment may incur a penalty fee if you stop paying premiums.
- Your debt remains constant throughout the mortgage period.
NB This information is provided to give you an overview of the different types of mortgages available. It is not comprehensive and you should not base your mortgage decision on the information found here. We recommend you seek professional advice in order to determine the most suitable mortgage for you.
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