What should you know about interest only mortgages?
After finding out which term of years works best for you, then think about the type of mortgage. The choice is between an interest only mortgage and a repayment mortgage. In the first, you only pay the interest on the loan during the term of years. This may be at a fixed rate or, more usually, a variable rate to give the lender a guaranteed commercial return on the capital invested. Whenever time runs out, the whole sum of capital falls due as a lump sum. Thus, your monthly instalments are low, but you need an investment plan to fund the capital repayment.
The most common plan is a life insurance policy with an endowment or other investment element. The death benefits pay off the capital should you die. The endowment or other term investment component should produce a guaranteed minimum return on a specific date so you can repay the capital. It would be a disaster if the insurance company failed to deliver enough to pay the whole sum owing. You might find yourself forced to sell assets to clear off any outstanding balance. If the investment delivers any additional return on top of the minimum required, you can pay for a holiday to celebrate.
So yet again it’s another of those balancing calculations for you. Use a mortgage calculator to work out exactly what the cost will be for both an interest only and for a conventional repayment mortgage. Now get comparative quotes for an endowment or similar insurance policy and see which gives you the better value. Unless, that is, your lender is offering you a tied insurance policy. Some lenders do this to collect a commission on the sale of the policy. Before you accept, check out how competitive the premiums and returns are on the policy.