What does Interest Only Mortgages mean?

The interest only type of mortgage includes paying as a monthly installment only the interest owed and paying nothing towards the principal of the mortgage. For example, an £100,000 which has a lifespan of 30 years with an interest of 6.25% interest only type, you will be required to pay around £520.

On the other hand, if you take out the same loan only the option of interest only is not as an option you can take, then you will be required to pay as much as £615. This sum of £615, if the loan is a fixed rate type, paid for 30 years would exactly suffice to pay off your mortgage in its entirety. You can see that there is a difference of £95 between the two options (with/without IO option), sum which normally would make the required payments towards the principal itself.

By taking the ‘risky option of an interest only mortgage type, this simply means it is your problem to sort out how will you raise enough funds so that at the end of your mortgage term you will be able to pay back your mortgage in one lump sum. Two of the most popular savings types individuals usually choose are the ISA mortgage (Individual Savings Account), and the endowment policy.