An interest only mortgage works by allowing the borrower to only make interest repayments to their mortgage lender, to pay off the cost of the interest during the mortgage term. However as well as having an interest only mortgage you will need to ensure that you have another means off paying off the mortgage amount. This can be a separate pension, an ISA (Individual saving plan) or an endowment and does not have to be provided by the mortgage lender.

In recent years many people that have struggled to afford to get on the property market have opted to take an interest only mortgage to keep their monthly repayments to a minimum. They have taken no repayment vehicle for the interest only mortgage with a view to sell their home to repay the mortgage or have the intention to switch to a repayment mortgage in the future.

Many first time buyers like to opt for an interest only mortgage to begin with as it is not only cheaper but as mentioned can be changed to a repayment mortgage at a later date. This has not been a problem in a rising housing market but in the last year as property prices have fallen by not repaying any capital on their mortgage some now find themselves in negative equity.

With the mortgage market still being tight many lenders restrict the maximum loan to value on an interest only mortgage to 75% of the property price. There are still some mortgage lenders offering interest only mortgages up to 90% however these are increasingly risky as property prices are still expected to drop 10/15% over the next 12 month.
Advantages and disadvantages of an interest only mortgage

As with all mortgage an interest only mortgage has advantages and disadvantages and here are a few of those.

Advantages

If your investment planned to pay off your mortgage exceeds its estimated growth you may find yourself being able to pay off your mortgage and have a lump sum at the end of the term. Choosing the investment vehicle for your repayment can be highly tax efficient.

Disadvantages
If for whatever reason you cease paying the instalments for your investment you could end up paying a penalty fee. If your investment does not perform as expected you could find yourself with a shortfall when it comes to paying off your interest only mortgage at the end of the term. During the mortgage period your level of debt will remain the same. If property prices fall below your mortgage amount you could have negative equity.

Interest only mortgage advice
For more information on an interest only mortgage you can either visit one of the many online mortgage comparison sites for more information, or speak mortgage advisors for fee free and independent mortgage advice.