Interest only mortgages

Interest only mortgages
When you receive a home loan the mortgage lender charges an interest rate for the lending service. So they provide you with the finances to buy a home and in return you pay them interest on the amount borrowed.

With an interest only mortgage you pay your lender only the interest rate back and not the actual capital they have lent you. The capital is only paid at the end of the mortgage term. In order to raise this capital you will have to invest elsewhere, until you have accumulated enough to repay the capital. This investment fund usually comes in one of three forms:

• An ISA (individual savings plan)
• A pension
• An endowment

The advantage of this type of mortgage is that your investment could potentially become larger than your mortgage meaning you could either pay your mortgage off early or receive a lump sum at the end of the mortgage term. With an interest only mortgage you can also invest your funds tax efficiently and therefore save money in the long-term. You should seek separate advice in respect of these investment types.

Repayment mortgages
Where the money you pay each month covers both capital and interest payments. If all the required payments are made throughout the term of the mortgage then the mortgage is guaranteed to be repaid at the end of the term.

Types of mortgage interest rate - important points
There are several different types of interest rate, however the most important one to understand is the standard variable rate (SVR). This is the rate lenders will charge you as standard, once any introductory discount rate periods have ended. If the SVR is high and you are tied into the scheme with an overhanging redemption penalty you could stand to lose all that you have gained from the introductory discount. So if you are considering an interest only mortgage such as a fixed rate or capped rate consider these points carefully before hand:

• What is the lenders SVR?
• Are you tied in? - is there an overhanging redemption penalty?

If there are any terms you do not know the full meaning of please refer to the Mortgage Glossary.