An interest only mortgage requires you to make monthly
payments to the mortgage lender in order to pay off the
interest on the amount borrowed. In addition to the interest
only mortgage you need to establish a separate long term
investment plan that will accumulate enough funds to pay
off the full loan amount at the end of the repayment period.
The investment plan required to pay off the mortgage usually
comes in one of three forms; an ISA (individual savings
plan), a pension or an endowment. This investment does not
have to be provided by the mortgage lender.
Pros
and cons of an interest only mortgage
Advantages You can choose an 'investment vehicle' that
is tax efficient. If the investment growth rate exceeds
those estimated at outset you may be able to pay off your
mortgage early or enjoy a lump sum at the end of the repayment
period, in addition to paying off your mortgage.
Disadvantages You have 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. (By monitoring your investment's
performance you could make additional contributions during
the repayment period if you felt the fund was under performing.)
Some forms of investment may incur a penalty fee if you
stop paying premiums. Your debt remains constant throughout
the interest only mortgage period
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