Interest Only Mortgages

With an interest only mortgage the borrower pays only the lenders interest charges each month until the end of the mortgage term. At the same time an investment vehicle is used to accumulate enough money to repay the total loan capital at the end of the mortgage term. This has its advantages and disadvantages. If your investment vehicle matures well you may be able to pay off your mortgage early and save money on interest charges if your lender is flexible about the time of repayment. Otherwise you will receive the excess amount of money made from the investment vehicle after the mortgage capital has been paid off at the end of the term. However, if your investment fails to mature sufficiently to repay the loan capital at the end of the mortgage term you will have to find the funds to repay the mortgage capital from elsewhere.

The following are the three main types of interest only mortgage:

• Endowment mortgage
• ISA mortgage
• Pension plan mortgage

With an interest only mortgage the borrower will have to make two payments per month: One to the lender for interest charges, and one into the borrowers chosen investment vehicle. The trouble with this is that the mortgage capital will not decrease because the borrower is not paying it off monthly. This means that the monthly repayments will not decrease during the mortgage term.

The interest rates available in the UK are as follows:

• Fixed
• Capped
• Tracker
• Discount
• Deferred

The above rates are offered by lenders usually for a limited period of about 2-5 years on most of their mortgages. However some lenders do offer products such as "life time trackers". The offered interest rate will remain in operation for the life of the mortgage in these cases. However most of these offers do not last for more than ten years of the total mortgage term. After this period ends you repayments will increase in conjuction with the lenders standard rate: