What is an 'Interest Only' mortgage?
An 'interest only' mortgage has monthly repayments that only repay the interest due on the outstanding loan.
This is alternative mortgage product to a "Capital and Repayment" mortgage which repays some of the capital borrowed each month, as well as interest on the loan.
An interest only mortgage is scheduled to last for a set term of, normally, between 10 and 25 years.
Repaying The Loan
Because the mortgage loan is not being repaid by the monthly payments, the onus of repayment rests with the borrower and they must make other arrangements for the loan to be repaid by the end of the arranged term.
This would normally be done by using a repayment vehicle such as an endowment policy.
What is an endowment policy
In simple terms, an endowment policy is an insurance policy, an investment policy and a savings policy all rolled into one.
Some of the monthly payment is spent on providing the life insurance element, which covers the policy holder to the maturity value of the policy.
The remaining funds are invested, with bonuses being added throughout the endowment's term.
On completion of the endowment's term, the policy pays out a cash sum.
As with all investments, it's impossible to be sure of an endowment's final fund value. So care must be taken to ensure the projected fund value is on target to repay the mortgage.
In recent times we have seen substantial shortfalls in the maturity values of endowments, causing to some homeowners to face large mortgages with no other means of repaying the loan.