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Like the title suggests, an interest only mortgage allows you to repay the level of interest on the mortgage and not the capital. Instead, the capital is paid in full at the end of the mortgage term. Of course, this entails a risk and a separate investment will be necessary to raise funds to pay the balance at end of term. Take warning, figures from the Council of Mortgage Lenders say the amount of people taking out interest only mortgages has doubled in the past year. This trend is storing up problems for the future as borrowers are left with huge debts and assets that they do not own. More...
The advantages which an interest only mortgage offer can be compelling. Interest only mortgages usually have a lower monthly repayment than a capital and interest mortgage plan.
An interest only mortgage option allows you to pay into an investment fund with the aim of paying the capital of your mortgage out of your earnings. The risk factor however ensures this repayment plan is not for the feint of heart. If investment presents too much uncertainty you will need to make separate arrangements to pay off the loan when the mortgage ends.
Interest only mortgages may appeal to those re-mortgaging or first time buyers who cannot initially afford a repayment mortgage. In fact, some lenders now have a specially designed mortgage products, which allows first-time buyers to transfer to a repayment mortgage scheme. (Although doing so may incur a fee).
What is certainly not advisable, is to bank on the value of your property increasing to such an extent that you can make a sale, pay off your mortgage at end of term and move on with a nice profit. Property prices are too unpredictable and an interest only mortgage should never be obtained on this basis.
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