An interest only mortgage is exactly that. You literally only pay the interest rate on the amount you borrow from month to month until the end of your mortgage term. However, you will still owe the original amount when your term has ended. Whereas a repayment mortgage means you pay back an amount of what you've borrowed plus interest each month. If you continue to make all of your payments, your debt will be settled at the end of your mortgage term.
The key aspect as to why people opt for interest only mortgage is the lower monthly payments. Although, to choose this mortgage option, lenders will prefer you to have a large deposit and will put you under close scrutiny over an approved repayment plan to pay off the capital at the end of the term. For example, if you borrow £250,000, over 25 years, on a 3% APR (Annual Percentage Rate) you would pay back £625 each month. Yet, you’d still owe the £250,000 at the end of your 25 year term. On a repayment mortgage, you could assume that you would pay around double that amount but it all depends which deal you get. So, interest only mortgages can make it more affordable on a monthly basis.
Before you can acquire an interest only mortgage, your lender will want evidence of an approved repayment plan, for when your term comes to an end. Depending on your lender, you may be able to include ISAs and stocks as part of your final payment. For alternative methods of paying off the capital, it may be worth talking to a financial advisor. You may be able to pay into an investment plan or set up regular overpayments, if your lender allows this.
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