What is an interest only mortgage?
As its name suggests an interest only mortgage is one where you only repay the interest each month. This means that you never reduce the amount outstanding. For example; if you borrow £100,000 over a 25 year period and keep up to date with all of the interest payments you will still owe £100,000 at the end of the 25 year term.

How do I pay off my intrest only mortgage at the end of the term?
Here are some typical options but by no means all.

A. Endowment Policy

You can take out an investment policy with an insurance Company known as an “endowment policy”. You will have to pay a monthly premium; the amount will depend on various things including the size of your mortgage, your health and your age. The premium you pay will be used by the Insurance Company in 3 ways: 

1. For life insurance so that your mortgage will be paid off if you die.
2. Administration charges to the Insurance Company.
3. To make investments on your behalf in order to grow the policy value. 

There is no guarantee that the value of the policy will be enough to pay off your mortgage at the end of the term.

B. Changing to a Repayment Mortgage at a Later Stage

A repayment mortgage is one on which you pay the interest due each month and in addition an amount towards paying off the balance. Changing to a repayment mortgage at a later date will mean your payments will become higher than if you had started with a repayment mortgage from the beginning.

C. Inheritance/Investments

Some people rely on inheritance they may be due to receive or other investments such as stocks and shares.
Whatever your own circumstances it is important that you have a plan for how you intend to pay off your mortgage at the end of the term. All of the above options carry an element of risk and you should discuss all of your circumstances with your financial adviser so that you can make an informed choice on what is best for you.

The following examples are based on a £100,000 mortgage taken over 25 years assuming a constant interest rate of 5%. (5.0% APR)

i. Capital Repayment Mortgage:

£584.59 per month, Amount Outstanding after:

ii. Intrest Only Mortgage:

£416.67 per month, Amount Outstanding after: