An interest only mortgage involves repaying just the interest on the mortgage debt each month. The amount borrowed does not decrease over the term of the loan. Alongside the monthly interest repayment, you will need to put money into a separate investment vehicle. This is designed to sufficiently increase in value to provide enough money to pay off your loan when your mortgage comes to an end.
For example, if you take out an interest only mortgage of £300,000, you would pay the interest due on that amount every month, but the capital amount would stay at £300,000. You would need to invest enough in a suitable financial product to generate the £300,000 required at the end of 25 years (or however long you took out the mortgage for).
You are responsible for making sure the capital is repaid in full when the mortgage term is completed. It is highly advisable to seek professional advice about which investment to opt for before you choose this type of mortgage product.
Today, most buyers looking for a loan to help them buy a property opt for a repayment mortgage rather than an interest only loan. This means part of the capital is repaid each month too, so at the end of the term, the entire amount is cleared. These loans involve a higher monthly payment than interest only loans, but there is far less risk involved providing you keep up with your monthly payments.
As some have found to their cost, it is possible to fall short of the sum required (sometimes well short), and that can put the very home you strived to purchase at risk.
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