Basic question about the mortgage guide

felicitygraham

Hi, sorry to ask what i am sure is a dumb question from a very financially un-savvy newbie who finds it very hard to follow numbers, but the guide (p8) is talking about the risk involved in interest only mortgages and it says

"The point is the investment you use to pay off the capital on your interest
only mortgage may soar, in which case it’d pay for your house plus more on
top, or it may plummet in which case you need make up the shortfall."

In a nutshell, I don't understand the paragraph or where the risk is or what investment i am supposed to be using to pay off what capital? I thought the idea with interest only was that you are *not* paying off the money you borrowed for the house??

poppy_f1

if you dont have an invesment vehicle running alongside your interest only mortgage, at the end of the mortgage term eg 25 years then you still owe what you initially borrowed and the risk is being unable to repay it

hope that explains it a bit better

UK007BullDog

An interest only mortgage is where you only pay interest on the mortgage. Which also means you will pay more interest than if you had a capital and interest repayment mortgage over the whole term of the mortgage. As you are not paying off any of the loan the amount stays the same so the interest stays the same as well (depending on the interest rate charged).

At the end of the mortgage term you still owe the lender the money you borrowed to buy the property. So if you do not have savings, ISA's some sort of investment in place that is valued the same as the mortgage you would not be able to repay the mortgage to the lender. Which means you would need to repay the lender by selling the property. Another risk is that if the house price were to have fallen and the sale does not bring in as much as the mortgage you would have a shortfall which you would need to cover. If the property is worth more then after the sale you would have made a profit.

If you have a capital and interest repayment mortgage then at the end of the mortgage term your mortgage would be paid off and you would then have a property mortgage free.

So, if you have an interest only mortgage what are your plans / where would you live at the end of the mortgage term? Carry paying on a mortgage when a pensioner? Could you afford that?

If you were to buy a Buy To Let property then I guess it is OK to have an interest only mortgage but I tend to advise to pay it off too if at all possible.

Hope this helps and makes it a bit clearer for you.