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Interest Only Mortgages..

More commonly associated with endowments the interest only mortgage does exactly what is says on the tin.


Under this type of mortgage all you pay to the mortgage company is the interest accumulated on the debt.  

Due to this fact the mortgage balance remains the same as it was
when the original advance was made, for example if you borrowed 75,000 under an interest only arrangement then after 25 years 75,000 will still be outstanding. This can be clearly seen in the diagram below.

Please note the graph below is not accurate and is for illustrative purposes only.



As only interest is being paid to the mortgage company and the debt is not reducing there is also a need to make some sort of provision to repay the debt at the end of the mortgage term. It is for this reason that endowments came about. However endowments are not the only plan that can be used with the aim of repaying an interest only mortgage, anything capable of producing a lump sum equivalent to the outstanding debt is capable of being used as a repayment vehicle such as an ISA or even a pension. Some people use the prospect of money coming to them in the future, such as an inheritance, as a repayment vehicle for an interest only mortgage. Caution should recommended in this situation as life has a habit of changing and to put the plans of repaying a large debt into the hands of a potential inheritance can be considered foolhardy.

It should be noted that with any investment related repayment vehicle, investments can go down as well as up and you may not get back the full amount invested. There is also no guarantee that the investment taken out will be sufficient at the end of the mortgage term to repay the mortgage.

Again as with the repayment mortgage the interest only payment that is made to the mortgage company is not necessarily the only thing you will need to be paying, you could and probably should, be paying in addition, buildings and contents insurance and life cover.


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