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Interest Only Mortgage

An interest only mortgage is actually quite a descriptive title for this product and it really does do as the name implies. That is, you pay off the interest only during the length of the mortgage. Then at the end, you are left with the original mortgage amount still to pay off.

This immediately hints at the main hindrance with this type of product - at the end of the term, there is no guarantee that you will actually be able to pay off the capital sum of the mortgage unless during the course of it you have been able to save the money by whatever means you choose.

Since that sounds unattractive, then why might people take out an interest only mortgage?

Well, the main reason is that the monthly payments are only the interest as mentioned rather than the capital sum too - in practical terms therefore this means your monthly payments are notably less than they would be on a repayment mortgage. Therefore if money is tight at the moment but you anticipate that it will be better in later years, then this could be an attractive mortgage product for you to consider.

For instance, if you are training to qualify for a profession such as an accountant then you will be on little money at the moment and therefore a repayment mortgage may be beyond you. However, once qualified then you can expect that your salary will go up considerably, and so in those circumstances this could be a good product; and of course you could always remortgage onto a repayment mortgage when the time is right.

If you do take out an interest only mortgage, then of course you should ensure that you set aside money each month that will enable you to pay off the mortgage at the end of the term. On a mortgage of 100,000 at the end of the term you will need to have saved 100,000 by whatever means to pay off the mortgage.

Remember, if really don't want an interest only mortgage as it costs considerably more than a repayment mortgage eventually then you can reduce the repayments per month on a repayment mortgage by taking it out over a longer term, though of course this does in turn increase the total sum that you repay.

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