If you still want to borrow interest-only, ask yourself the following questions first

• Am I clear about the long-term risks and costs of not setting up a repayment vehicle right away? 

If you can’t clear the full debt when the time comes, you could lose your home.

 

• Can I afford to take the same mortgage on a repayment (capital and interest) basis even if it means cutting back on other spending for a few years? 

Going for repayment is cheaper over the long term because there’s less interest to pay and the capital debt will be cleared without you having to take on an expensive and risky investment plan.

 

• Could I afford a repayment mortgage if I increased the term from, say, 25 to 30 years? 

This will increase your total interest bill, but at least it will mean your entire debt is cleared without having to worry about a repayment vehicle.

• If I really can’t afford a similar size of repayment loan, can I find a cheaper, less risky way to keep my costs under control? 

It could be worth buying a slightly cheaper property if it would enable you to afford a repayment loan. You can always trade up when your financial situation improves.

 

• Do I understand the various types of repayment vehicle and the costs and risks involved? 

Possible repayment methods include investing in a stocks and shares Isa (individual savings account), saving into a high interest bank or building society cash Isa or selling other property.

Most experts agree that saving into an endowment policy or a pension plan for this purpose is not a good idea. For more on this, see The endowment mortgage and The pension mortgage.

If you are still determined to take an interest-only mortgage, look for one with flexible features, that allows you to make additional one-off payments when you can afford them, to reduce the capital sum.

And make sure you consult an independent financial adviser before settling on a repayment vehicle. This is a costly and uncertain, long-term commitment, so it’s essential to choose wisely.