The Pros and Cons of Interest-Only Mortgages

Interest-only mortgages are more risky than repayment mortgages, as there is no guarantee that you will pay off the loan and so own your home when the mortgage comes to an end. This is because, instead of paying back the loan little by little, the whole of your monthly mortgage payment is made up of interest. None of the capital you have borrowed is paid back into the end of the mortgage term, when you will be expected to pay off the entire loan in one go.

To ensure that you have a sufficiently large lump sum to be able to do this, you should make payments into some kind of savings plan to back up your mortgage, as well as making the normal mortgage payments. The risk you take is that the savings plan may not produce the lump sum you need to repay the mortgage, although if your investments do exceptionally well you could end up with more than you need to clear your mortgage debt.

Disadvantages

• Your debt remains constant throughout the mortgage period.
• There is no guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the investment could perform below that assumed at the start.
• Some forms of investment may incur a penalty fee if you stop paying premiums.

Advantages

• Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.
• You can choose an 'investment vehicle' that is tax efficient.
• If the investment growth rate exceeds those estimated at the outset, you may be able to pay off your mortgage early or receive a lump sum at the end of the repayment period, in addition to paying off your mortgage.