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Home > Mortgages > Interest Only
Most mortgages are known as repayment mortgages. This means that each month you pay off a proportion of your interest plus a part of the original principal amount that you borrowed. Gradually the amount owed decreases and you pay more off the principal each month and less interest.
With interest only mortgages you only have to pay the interest part of the payment each month. If you don't pay off any of the principal your interest payment will stay the same each month (assuming that interest rates stay the same).
The advantage of this kind of mortgage is that you have lower monthly payments. That then allows you to invest the additional money that you would have otherwise paid in some other kind of account. People often invest this money in ISAs (individual savings accounts) that have tax advantages.
Having lower monthly payments may tempt you not to invest any additional money each month, thinking you can make it up later. This can lead to a large shortfall when the time comes to pay back the loan. Money invested early on has longer to grow so any money not invested at this early time can lead to a larger than expected deficit in 25 years time.
If you are investing your money in the stock market, don't forget that this involves a risk factor - share prices can go down as well as up and a lower than expected return on these investments can lead to trouble later on.
With normal repayment mortgages the amount you owe steadily goes down in time, meaning that the interest you have to pay goes down too. If, as with an interest only mortgage, you aren't paying any of this back, the actual amount of interest paid over time will be higher, even if the interest rates on the loans is the same. Make sure you take this into account when trying to work out which loan is right for you.
As with all kinds of mortgages, you are putting your home at risk if you can't keep up repayments on that loan.
Interest Only Mortgages
Interest only mortgages seem to be becoming increasingly popular.Most mortgages are known as repayment mortgages. This means that each month you pay off a proportion of your interest plus a part of the original principal amount that you borrowed. Gradually the amount owed decreases and you pay more off the principal each month and less interest.
With interest only mortgages you only have to pay the interest part of the payment each month. If you don't pay off any of the principal your interest payment will stay the same each month (assuming that interest rates stay the same).
The advantage of this kind of mortgage is that you have lower monthly payments. That then allows you to invest the additional money that you would have otherwise paid in some other kind of account. People often invest this money in ISAs (individual savings accounts) that have tax advantages.
Dangers of Interest Only Mortgages
Of course these advantages come with a potential price. You still have to pay the money borrowed back at the end of the loan (usually in 25 years). What happens if you haven't saved or invested enough money to make that payment.Having lower monthly payments may tempt you not to invest any additional money each month, thinking you can make it up later. This can lead to a large shortfall when the time comes to pay back the loan. Money invested early on has longer to grow so any money not invested at this early time can lead to a larger than expected deficit in 25 years time.
If you are investing your money in the stock market, don't forget that this involves a risk factor - share prices can go down as well as up and a lower than expected return on these investments can lead to trouble later on.
With normal repayment mortgages the amount you owe steadily goes down in time, meaning that the interest you have to pay goes down too. If, as with an interest only mortgage, you aren't paying any of this back, the actual amount of interest paid over time will be higher, even if the interest rates on the loans is the same. Make sure you take this into account when trying to work out which loan is right for you.
As with all kinds of mortgages, you are putting your home at risk if you can't keep up repayments on that loan.
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