Interest Only Mortgages
The payment to the lender for an interest only mortgages is less than a repayment mortgage because no repayment of capital takes place during the mortgage term - this means you will always owe what you originally borrowed. You will need a means of repaying the mortgage at the end of the term, the cost of this combined with the interest payments will be similar to a repayment mortgage.

Only a few lenders offer pure interest only mortgages - i.e. when you do not have to have a repayment vehicle in place to repay the mortgage. You will generally pay a higher rate of interest for such mortgages.

Savings plans running alongside interest only mortgages that are acceptable to lenders...

• ISA's (Individual Savings Plans) which are flexible and tax efficient (calculator)
• Pensions, although you have to pay a lot because only 25% of the fund can provide a lump sum capable of repaying the mortgage (calculator)
• Endowments, although these have suffered a lot of bad press because of their inflexible structure, high charges and lack of tax efficiency - life cover is included though.

You can work out how much you will have to save to repay your mortgage by clicking o the calculator links

*Warnings*
Investments depend on growth rates that cannot be determined from outset. You may therefore get back more or less than the amount projected.

An interest only mortgage with an investment will only prove better value than a repayment mortgage if the rate of return on the investment exceeds the interest rate on the mortgage plus the costs of running the investment (costs may amount to 2%pa). This assumes the monthly outlay to each type of mortgage is the same. So, to beat a repayment mortgage of 5%pa, an investment would have to return 7%+pa (assuming 2% charges).

Always seek advice before choosing an investment

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