Here are some of the most commonly asked questions about interest-only mortgages.

Q: Let me get this straight. If I take an interest-only mortgage, after 25 years of monthly payments, I will still owe the same amount I did when I took the mortgage, and until I pay that back my house could be repossessed?

A: that’s exactly right. All you will have paid off is the interest your debt has accrued.

You will not have made any contribution towards paying off the capital sum (the amount you borrowed) and at the end of the mortgage, you will be expected to clear this in a single payment.

 

Q: What happens if I can’t pay off the capital sum at the end of the mortgage term?

A: If you can’t find a source of cash to settle this debt, you face the choice of taking out another mortgage, selling your house or having it repossessed by your lender.

Remember, this is likely to happen just as you’re approaching retirement a time when most people aim to be free of debt.

 

Q: So how do I ensure I can clear the capital debt? 

A: You need to set up a repayment vehicle as soon as possible and start saving regularly.

This might be a stocks and shares Isa (individual savings account), a cash Isa or another property investment you need to consult an independent financial adviser to discuss what’s best for you.

But whichever you choose, fluctuating stock market returns, interest rates and property prices will mean you can never be certain of having enough money to pay off your debt. That’s why it’s far less risky and in the long run, cheaper to go for a repayment mortgage.

 

Q: Interest-only mortgages sound like the endowment mortgages my parents generation had. Are they the same thing? 

A: They can be. Endowment mortgages combine an interest-only loan with an endowment policy to repay the capital. Nowadays, most people consider these far too risky to use as a repayment vehicle.

The key difference though, it that mortgage lenders no longer insist you have a repayment vehicle organised before they will lend on an interest-only basis.

Many people are taking advantage of this to cut costs by putting off setting one up.

This is dangerous because the longer they leave it, the harder it will be to save enough to clear their debt, putting them at risk of losing their home.

 

Q: Can I start out with an interest-only mortgage and switch to a repayment mortgage when Im earning more? 

A: You certainly can.

But bear in mind that your monthly costs are likely to increase significantly, as you will start repaying the amount you borrowed when you make the switch.

And you will have a shorter time in which to do this than if you’d been repaying it from the beginning of your mortgage term.

 

Q: Ive heard it’s possible to get flexible interest-only mortgages, where you pay interest each month and repay chunks of the capital sum whenever you can afford it. Are these a good idea? 

A: Flexible mortgages can be a very good idea, provided you choose one that allows penalty-free repayments and the terms and conditions suit you in other ways.

In an ideal world, you would plough all your spare cash in, leaving you debt-free years early and saving thousands of pounds of interest in the process.

But you do need to be disciplined and it’s important to remember that if things don’t go as you hope, you will still have some of the capital sum outstanding at the end of the mortgage and you’ll need to find a way of repaying this.

 

Q: Someone mentioned something called a part and part mortgage as an alternative to going interest-only. What is this and is it worth considering? 

A: A part and part mortgage is a halfway house between an interest-only loan and a repayment (capital and interest) mortgage.

Part of your mortgage is interest-only and the rest is repayment.

This keeps the initial costs down, while reducing the total interest bill and outstanding capital debt.

 

Read More about Interest Only Mortgages

 

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