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Interest Only Mortgages

Interest only mortgages have made a return to the mainstream news recently. But what are they, and are they worth your while? We're going to take a closer look in our guide to interest-only mortgages. Read on to find out more.

What is an interest only mortgage?
When you take out a mortgage on a property, you will have two different costs to meet. You will pay the lender interest on the original loan, and you will also pay the actual loan, increasing your capital in the property. Every month you will make a single payment, and part of it goes towards the interest, and the rest goes into the capital. For an interest-only mortgage, you only pay back the interest on the loan - not the loan itself. This, of course, makes your monthly payments cheaper. It can be a handy tool for people looking to get on the property ladder who may not be able to afford a standard mortgage payment each month.

How do they work?
You only pay the interest on the original loan with an interest-only mortgage. That interest rate is based on the full amount lent to you in the first place. However, when you're only paying back interest, you will still owe the original value of the property by the time your mortgage period ends.

What are the benefits?
As we mentioned above, interest only mortgages are a good way for people struggling to afford to buy a home to get on the property ladder. And, they are also good for those who need to free up cash for other investments. You might put that money into stocks and shares, for example. Or, you could even explore financial products such as ISAs. The idea is to put the money away so that when the interest-only period ends, you can afford to pay off the capital on the property.

Are there any problems?
There are plenty of risks of taking out an interest only mortgage. In effect, you are gambling on the value of the property rising enough over the term to make it worth your while. However, should the property value drop, you might be in a serious position. You will still have the capital to pay back, at a value that is more than the property is worth. So, even selling the home will leave you with a shortfall that you still have to pay back. You will also pay back more interest over the term than you would with a standard repayment mortgage. This could negate any profits you make from your alternative investments - and may even cost you money.

Should I get one?
Anyone considering an interest only mortgage should have a big think before taking the plunge. However, in certain circumstances, you can make them work for your situation. If house prices in your area go up, then you should come out ahead, and interest only is a great tool for those wanting to get on the property ladder. As long as you are careful and use the monthly savings to invest in other, stable areas, you can see some success.