Interest Only Mortgages

Interest only mortgages are frequently misunderstood. To begin with, there is often a lot of confusion over exactly what they are. For example, an endowment mortgage is an interest only mortgage, but not all interest only mortgages are endowment mortgages. So how do they differ? Interest only mortgages don’t cater for any payments towards the cost of your original debt. So how do they work? And, most important of all, what’s so good abut interest only mortgages anyway?

It’s true: unlike standard repayment mortgages, interest only mortgages don’t have any impact on your original debt. But by paying off the interest on your loan you do still continue to manage your debt. The interest that accrues to an initial mortgage loan is generally so large that paying off the interest is in itself a big part of managing your mortgage. But the question remains: at the end of the agreed period, when the interest has all been repaid and only the original loan remains – how do you pay it?

There are a number of alternatives. Having freed up a sizable sum of monthly money that would otherwise have gone toward repaying a combination of original mortgage debt and interest, you decide what to do with it. Save it; invest it; just make sure you work it! That’s key. Whether you invest the money you’ve saved in a higher earning interest account or an endowment policy, make sure it’s working for you: accruing interest and building to the expected proportions. Because that’s how you’re going to pay your dues when the time comes.

How you invest your money now determines how easy it’s going to be when you finally repay the lump sum loan. If you’ve invested wisely you’ll be quids in. Even if you’ve invested conservatively, you’ll be able to settle the score comfortably, provided you’ve monitored your investment throughout the term of the loan. Do that and you won’t have anything to worry about.

That applies to endowment policies too. An endowment policy is just one type of interest only mortgage scheme. It differs from other schemes inasmuch as it is clearly regimented. Instead of apportioning your monthly sum of money as you see fit, you invest it in a specific assurance policy. That means you’re bound by the conditions of the policy and subject to its variations. The risks may be a little greater, but as you’ll see on the next page, the potential rewards are very enticing. If you’re in any doubt, don’t be afraid to consult your broker; in fact it’s advisable. Whatever route you take, make sure you work together to ensure your goals are achievable.

Provided you know what you’re doing, there’s absolutely nothing to worry about. After all, taking out an interest only mortgage is often seen as a shrewd move for young investors, and for anyone who’s finding it hard to make ends meet, (possibly because having just met the initial cost of a down payment on their property there’s not a lot of day-to-day money left.) In short, an interest only mortgage can be the perfect plan for anyone who needs a little bit of flexibility in the early stages of their re-payment plan; or for anyone who needs a little bit of ready cash to throw at anything other than the monthly mortgage payment.

Home buyers in this category are sometimes advised to take out an initial interest only mortgage as a way of getting them back on their feet, before moving on to a standard repayment mortgage in due course. The interest only payments are much less onerous than the customary repayment plans and give them a little more latitude to take it easy before getting lodged into the monthly grind. For these investors, an interest only mortgage is a life saver. It satisfies their obligations to the lender without compromising their finances. It gives them time to enjoy their new home. Best of all it gives them the opportunity to take control of their mortgage right from the start.

Interest only mortgages come in different permutations, because home buyers are all very different people. Whether you’re a shrewd investor with an eye on the markets, or you’re a first time buyer with an eye on your overdraft; interest only mortgages are available to meet your respective needs.