INTEREST ONLY MORTGAGES

Interest-only mortgage deals are becoming increasingly popular with first-time buyers looking to keep their monthly repayments down. First of all, you need to know how an interest-only mortgage works It's easy to be led into the 'borrow more, pay less' promise of interest-only mortgages. Are these deals as good as they look? Is taking out an interest-only mortgage really the best way to cut your monthly payments? Or are you embarking on a dangerous short-term strategy with costly long-term consequences? With any mortgage, you have to pay back the original capital debt and you have to pay interest on that debt. With a repayment mortgage, you spread the repayment of the capital debt and the interest into even monthly payments over the course of the mortgage term. When you take out a 25-year mortgage, at the end of those 25 years, your mortgage is guaranteed to be paid off. When you take out an interest-only mortgage, you only pay back the interest on the mortgage every month. This looks good. However, there is a problem, the capital debt is still outstanding. In other words, you haven't actually paid back any of the amount you originally borrowed. An interest only mortgage is an option regarding the repayment of your mortgage loan. This means that your monthly payments will only cover the interest that you are paying on the loan. Because of this you are never paying off the original sum and when you reach the end of your mortgage term the amount that you will owe the mortgage lender will be unchanged. This sum of money will still be outstanding at the end of the mortgage period, so you will need to have made provisions to finance a lump sum payment for this entire amount. This could be achieved by the following examples:

• Making regular payments into a savings or other investment every month.   
• Converting to a repayment mortgage during the term of the original interest only  mortgage. This is suitable if currently your earnings are at a lower level but are expected to increase in the future as it keeps the monthly payments down at the beginning and then allows you to pay higher monthly repayments later on a repayment mortgage.
• Attaining a lump sum from another source.
• Selling the mortgaged property itself to be able to pay off the original loan taken out for it.