Thread: What is an "interest only" mortgage I keep hearing about?

I mean it sounds like you only pay interest, but what does that mean?

That's right, you only pay interest in your monthly payment. So your monthly payment is less because you're not also paying down your principal. The downside is that you're not paying off your loan at all.

In the UK interst-only mortgages are now deemed as high-risk. As Erik says you are only paying the interest on the loan so you still have the full amount of capital to repay at the end of the mortgage term. Most lenders now require you to pay into some sort of investment alongside the mortgage to ensure that you have sufficient funds to repay the mortgage at the end of the term. Suitable investments include pensions, ISAs and endowments. Of course these investments are not guaranteed to be able to repay the mortgage hence the risk.

The alternative is a repayment (capital and interest) mortgage which pays back the capital as you go along. As long as you make your payment every month the mortgage is guaranteed to be repaid at the end of the term.

You also pay less interest on a repament mortgage as the interest is calculated on the constantly reducing debt.

Interest only mortgages should only be used for investors who need a short term bridging of finances. If you are considering a interest only mortgage then realise that you will only be paying the interest and as interest rates are low at the moment then it may seem like a good idea, when interest rates rise then you may find a problem. Interest only mortgages should not be used as a long term goal because you are always carrying a debt you will not be reducing, if not managed right it can lead to bankruptcy, debt management plans ect.