Interest-only Mortgages Guide

With interest only mortgages only the interest is actually paid off with each mortgage payment. The borrower also takes out at the same time, an alternative 'repayment vehicle' (method of paying off the mortgage) such as an ISA, pension plan or an endowment policy.

The monthly repayments do not repay any of the outstanding capital balance. So it is important that the repayment vehicle payments are maintained, otherwise it will not be possible to pay off the mortgage at the end of the term.

Endowment Policies - This is the most common type of interest only mortgage which also provides life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that, at maturity, the amount invested and earnings are enough to pay off the mortgage. However - there is no guarantee that, when the endowment matures and 'pays out', the balance will be sufficient to repay the mortgage, the funds success depends on the interest rates.

ISA - The Individual Savings Account (ISA) is a tax free way of saving. Using an ISA as a repayment vehicle has increased in popularity, however due to the ISAs complexity, it is only for the financially sophisticated or borrowers taking advice from a qualified financial adviser.

Pension Plan - Life assurance cover is provided and the monthly payments are then made into a pension fund. When the benefits are eventually taken, the mortgage is repaid using tax-free cash from the remainder of the fund.