Interest-only mortgage
How does it work?
Your monthly payments represent only the interest due to the lender, and do not include repayment of capital. Your total loan must be repaid at the end of the mortgage term. You may therefore need to arrange additional investments which will generate sufficient capital to repay the loan.
Advantages
You can choose from a variety of investments, some of which have tax advantages. Should you move or arrange a remortgage, your investment can usually be reallocated to the new mortgage.
Disadvantages
Unlike a repayment mortgage, the amount of debt outstanding does not reduce over time, and there is no guarantee that the investments chosen will grow sufficiently to repay your loan. Also, investment-linked interest-only mortgages can be slightly more expensive than repayment mortgages.
Three well known types of interest-only mortgages are: -
