Interest Only Mortgages

With interest only mortgages you pay the lender only the interest on the amount borrowed instead of paying back the interest as well as the principle (the amount you borrowed initially). This option allows the borrower to maintain a loan, but not to chip away at the amount owed to the lender.

At the end of the term of an interest only mortgage you are required to pay back the amount originally borrowed. Unless you have enough money at the time you apply to repay the loan, you will be required to take out and maintain an approved investment product, such as an endowment, ISA (Individual Savings Plan) or pension plan, to build up funds to enable you to pay back the original amount of your loan at the end of the mortgage term.

If you put your money into an investment product, its growth will be entirely independent of your mortgage. Therefore, it can be used together with future mortgages should you move to a new house or change lenders.

Interest only mortgages seem convenient, but the downside is that when you take one on you will not be decreasing your debt over the years. In order to take on this sort of mortgage you must be absolutely certain that at the end of the mortgage term you will have saved enough money to pay it off.

This type of mortgage was originally geared towards well off investors who preferred to use the principle part of the mortgage payment for other investments. The interest only mortgage worked for these people because instead of having all of their money tied up in real estate, which usually offers relatively low returns, they could invest in the stock market and hope for much higher returns thereby building assets more effectively.

Because the stock market is volatile, the strategy of investing in stocks to build assets instead of regularly making payments on the principle of a mortgage is only viable for people who have enough money to offset the risks they take.

Over the years investment only mortgages have become popular among the masses whenever there is a “seller’s market.” A seller’s market occurs when many people are competing for the same properties, which causes sellers raise the asking price of their houses. Buyers without considerable assets were therefore easily outbid. Interest only mortgages became a way for these people to leverage their money.

Though there are obvious risks involved with deciding to take on an interest only mortgage, for some the benefits far outweigh the risks. The interest only mortgage can be a means by which to acquire the home of your dreams without having to fork over huge mortgage payments each month.