Finance >> Mortgage >> Interest only Mortgage >> Interest only Mortgage

Interest Only Mortgage

Interest only mortgage is another form of mortgage available. As the name itself suggests the mortgager needs to pay only the interest during the term of the mortgage. The advantage of this Interest Only Mortgage is that the buyer pays less than the usual mortgage. But the disadvantage is that the amount borrowed remains the same at the end of mortgage term and it needs to be paid in the end which is a considerable burden.

However Interest Only Mortgages have a parallel replacement vehicle like endowment policy, investment fund, property or pension fund into which the buyer makes regular payments. This helps to repay the mortgage sum at the end of the term of mortgage which is generally 25 years or longer.

The interest only mortgage differs from repayment mortgage in the sense that in repayment mortgage the borrower pays a fixed sum every month and the capital gradually reduces and the borrower needs to pay a very small sum at the end and the interest also reduces gradually. It is vice versa in the case of Interest Only Mortgage as the borrower ends up repaying more at the end of the term.

So Interest Only Mortgage are suited for those looking out for short term mortgages. These mortgages should never be chosen on a long term as it is a risk to the borrower until and unless he has a proper replacement vehicle planned at the end of the term and the payments to the replacement vehicle are done accurately and without defaults.