Interest Only Mortgages

An interest-only mortgage is not what it seems to be. While mortgage borrowers are able to receive a lower monthly payment and maximize the tax deduction through this type of mortgage, sooner or later the homeowner will have to pay the principal on the interest-only mortgage. What mortgage borrowers really get with this type of loan is an interest only payment plan that is usually combined with a traditional mortgage

Interest-only mortgage payment options began to be offered to consumers not as a way to leverage their money, but as a way for them to borrow more money while not increasing the monthly payment. For example, in a repayment mortgage, for a monthly payment of £600, about £500 of that is interest, and only about £100 goes toward repaying the principal. With an interest-only arrangement, all of the £600 goes directly toward paying the interest cost.

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That extra £100 in monthly flexibility would allow you to borrow approximately an additional £20,000 — enough to be the high bidder, or to help buy a somewhat larger home. Mortgage borrowers who employ this method are not "cash-flow" or "income-leveraging" borrowers. What they are doing is simply buying themselves more debt. As such, they were typically aimed at well-heeled, savvy-investor-type clients who preferred to utilize what would have been the principal portion of their payment for other, hopefully more productive investments.

Interest-only mortgage payment schedules are extended on Variable Rate Mortgages (VRM), but they can be included on a fixed rate mortgage (FRM) as well. (A Variable Rate Mortgage is when the interest rate can change according to the market. A fixed rate mortgage interest is set at a certain amount for a set amount of time; after that time, the rate can change according to the market. They have also entered the mainstream, so they are available to just about all borrowers.

Interest-only mortgages do offer an advantage to the savvy consumer, however, if they are in need of college tuition fees, additional home repairs, or other expenses, or who would like to invest the additional money saved. Before signing for any mortgage, speak with our mortgage advisers for all the options that are available to you.

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