Interest only mortgages, as there name suggests; you only pay off the interest on the amount borrowed, it is up to you to make your own arrangements to ensure the capital is paid before or at the end of the mortgage term.
The way in which you pay the capital is known as a “vehicle”. These so called vehicles are normally in the form off: endowment policies, pension plans or ISAs. Other ways the capital can be paid off is via an inheritance or the sale of another property or assets for example.
Advantages & Disadvantages
Advantages
With this method you only cover the interest owing on the mortgage, the amount borrowed remains the same.
You must also make regular payments to a savings plan, this builds up money and then repays the mortgage in a lump sum at the end of the mortgage term.
If the savings plan grows to be worth more than the mortgage you will be left with a cash lump sum.
Disadvantages
The plan’s projected value may not be achieved if the investment has performed badly. This means that there may be insufficient funds in the plan to repay the mortgage. Many types of plan however, track the growth of the fund enabling a borrower to check it is on target and may give advice to increase the payments where necessary.
If you wish to sell your property during the term of the mortgage you need to be able to repay the whole amount borrowed.
Most types of interest only repayment plans are long term investments. Cashing them in early can incur high costs.
During the early years you may not get back all you have paid in. In particular, be aware that you may need to cash in at a time which may not be favourable to you because of investment conditions.
