Welcome to the final instalment of
A Guide to Mortgages. This article looks into the interest only mortgage.
The Interest-only mortgage option
If you choose this option, then the payments you make will only pay the interest and not the outstanding capital balance on your mortgage account.
Consequently, at the end of the
mortgages term you will still be left still owing the original amount that you borrowed. If you cannot pay this outstanding amount then the mortgage lender is within their rights to repossess your property.
If you go with this option then you will need to organize a way to repay the capital debt at the end of the term. This can be done in one of the following ways:
Endowment
An endowment policy is a stock market investment plan that runs alongside your mortgage. They are now considered to be a risky investment, so it’s probably wise to avoid this option if possible.
With an endowment policy, monthly payments are made with the idea that the money invested will grow substantially. By the time the policy term ends, the investment should have grown to such an extent that the outstanding capital can be covered. Promises were made that ten of thousands of pounds would be left over for holders to spend on other luxuries by the time their policy had matured. Unfortunately, things didn’t go to plan and there were subsequent reports of endowment holders being left facing nasty shortfalls.
An ISA
ISA stands for Individual Savings Account. This is a tax free method of saving. Using an ISA as a vehicle for repayment is steadily growing in popularity and is generally considered to be one of the best repayment options. But, due to the ISA’s complexities it is recommended that the borrower seeks advice from a qualified financial advisor before making any commitments.
Pension Plan
It’s possible to use the cash from a pension plan to clear the debt. Normally, this option is taken by those who are self employed. Again, it’s important to only go ahead with
mortgages of this type once advice from a financial advisor has been sought.
And finally
With interest-only
mortgages you are faced with a degree of risk. If things don’t go according to plan and your repayment vehicle fails to perform as expected, then you could be left without the funds to clear your debt.
If you feel uncomfortable with this level of uncertainty, then it’s advisable to go for the repayment mortgage instead.
