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I is for Interest Only Mortgage
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INTEREST-ONLY MORTGAGES
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This type of mortgage is structured so that monthly payments to the lender purely cover the interest on the loan only.
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With an interest-only mortgage, as opposed to a repayment mortgage, monthly repayments are lower but your monthly payments do not pay off any of the debt.
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At the end of the mortgage term, the full amount is paid back as one lump sum.
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A savings plan is often set up by a borrower which is designed to repay the original loan at the end of the mortgage term (subject to the savings plan performance). Other borrowers will rely on the capital generated from investments or inheritance to pay it off.
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Since the 2008 financial crisis, the number of lenders offering interest-only mortgages in the UK has reduced dramatically, mainly due to the fact that this type of mortgage is seen as risky. It relies on the borrower having a solid savings plan in place to enable them to pay off the full amount at the end.
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For those that are unable to repay the lump sum at the end of the mortgage term for whatever reason, there are several options to consider, including taking out a new interest-only mortgage, switching to a repayment mortgage, selling the property (downsizing) or taking out an equity release plan.
This type of mortgage is structured so that monthly payments to the lender purely cover the interest on the loan only.
⠀⠀⠀⠀⠀⠀⠀⠀⠀
With an interest-only mortgage, as opposed to a repayment mortgage, monthly repayments are lower but your monthly payments do not pay off any of the debt.
⠀⠀⠀⠀⠀⠀⠀⠀⠀
At the end of the mortgage term, the full amount is paid back as one lump sum.
⠀⠀⠀⠀⠀⠀⠀⠀⠀
A savings plan is often set up by a borrower which is designed to repay the original loan at the end of the mortgage term (subject to the savings plan performance). Other borrowers will rely on the capital generated from investments or inheritance to pay it off.
⠀⠀⠀⠀⠀⠀⠀⠀⠀
Since the 2008 financial crisis, the number of lenders offering interest-only mortgages in the UK has reduced dramatically, mainly due to the fact that this type of mortgage is seen as risky. It relies on the borrower having a solid savings plan in place to enable them to pay off the full amount at the end.
⠀⠀⠀⠀⠀⠀⠀⠀⠀
For those that are unable to repay the lump sum at the end of the mortgage term for whatever reason, there are several options to consider, including taking out a new interest-only mortgage, switching to a repayment mortgage, selling the property (downsizing) or taking out an equity release plan.
About this article — written by the Agreed team. We publish honest, hands-on guides on UK property based on what our associates and developer partners are actually doing day-to-day. Spot something out of date or wrong? Tell us via the contact page.