An interest only mortgage is a mortgage where you will only need to pay the interest each month. This means that you will be charged interest and then have to pay that and you will not need to make any repayment of the amount of money that you have borrowed until you get to the end of the mortgage term. This is likely to be between twenty and thirty years.
Advantages of an Interest Only Mortgage
Doing this means that you will be able to use the rest of your money how you please and you will not be forced to pay off the mortgage with it. Most people will choose to invest some money each month and then their money will hopefully increase in value and then by the time they need to repay the mortgage they will have enough to pay for it and they may even have a bit extra left over as well. If what they have chosen to invest in does well, then they will have some extra money to play with or they will be able to start paying in less as they move towards the end of the mortgage.
Only having to pay the interest means that if you are struggling money wise, they you can reduce what you are investing and simply only pay the interest. Then you will be able to continue to keep your home and hopefully make up for the lack of paying in money at a later date. This flexibility can be really appealing.
Disadvantages of an Interest Only Mortgage
If you end up investing in something that does not do well, then you may need to find money from somewhere else in order to pay off the mortgage at the end of the term. This has happened in the 1980’s when a lot of people used endowment funds to invest in and the stock market did not do a s well as predicted and they had to start paying in more money in last years of their mortgage to make sure there was enough to repay it, when they had initially hoped that they would be able to have some extra money at the end form the endowment that they could have once the house was paid off. This means that it is really important to make sure that there is enough money being paid in and that you monitor the money so that you know how much is there and work out regularly whether there will be enough. If you have a financial advisor, they might be able to help you with this but you should also be able to work out targets for how much money you should have accumulated each year so that you can check if it is enough.
It can be very tempting to think that because the house will increase in value, that you will not need to worry about paying off the mortgage. You could think that you will be able to sell the house when the mortgage is nearly running out and then use the proceeds from the sale to pay off the mortgage and then use the money that is left over, to put down on a new home and get another mortgage. While this sounds good in theory there are a few flaws. Firstly, the house may not gain in value and so it may not sell for enough to repay the mortgage. You may find that the money left is not enough for a deposit. You may not be able to get another mortgage because you only repaid the interest on the last one and did not invest (this could be revealed if they investigate your finances) or you might be close to retirement age and lenders may not want to lend you money beyond you working years. You will eventually have to pay for a home if you want to won one. You will not be able to keep selling and getting a new mortgage.