Guide to Interest Only Mortgages UK

Interest only mortgages are where you pay only the interest payments on a fixed time of 25 years. In these mortgages you need a separate plan to save money so that you can repay the capital on the mortgage at the end of your 25 year period. But the problem with interest only mortgages is that there is no guarantee that you will be able to pay off the mortgage at the end of your mortgage period.

But there are some advantages of Interest Only Mortgages, such as:

* Lower monthly repayments because of not having to pay additional contribution to the mortgage equity.
* More flexibility to invest in other schemes and to get a potentially better return on investments.
* Beneficial for borrowers who expect significant financial outlays in the beginning of their mortgage period (e.g. school fees), but also expect to get increased income in the future.
* Ideal for first time buyers to get on the property ladder and keep their mortgage payments affordable.
* At the end of the 25 year period you will owe the same as when you started it, but mind inflation will have reduced the real cost of housing, making it relatively easier to pay back

Disadvantages of Interest Only Mortgages

* Your alternative investment scheme may fail to deliver the necessary amount to pay back the loan. E.g. if you buy a house for £200,000, it is no mean feat to save that up on your own.
* Unlike ordinary mortgages, you will pay more over the course of the mortgage term, because you keep paying interest payments on the full amount, ie., 5% of £200,000 for 25 years.
* There is no guarantee your income may increase in the future so that you are in a position to pay back the mortgages.
* When interest rates increase or if rates fall, it has a proportionally bigger effect on your mortgage.
* Saving money is not an easy task. It is not easier than it may appear.