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> Interest
Only
With Interest only mortgages the
loan
is not paid off during the mortgage term, but instead just the
interest is paid to the lender and the original amount borrowed
needs to be paid at the due date of the loan term. Generally the
mortgage holder will also be paying into an investment that has
the potential to build up a lump sum, which is then used to pay
off the mortgage at the end of the term.
At present there are many types of interest only mortgages on
offer these include the ISA
mortgages (formerly PEP), Pension
mortgages and the previously most common type, the endowment mortgages.
Effectively there is a gamble with investments,
grown sufficiently the savings
should have built up to a value to pay off the loan and may
even provide a surplus over and above the loan amount. In addition
you may have saved money during their mortgage term by paying
out less each month than with a repayment
mortgage. However, in recent years investment returns have
been lower than expected and therefore you could face a shortfall
when you come to pay off your mortgage, or you could have to pay
more each month than with a repayment mortgage.
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The risk associated to interest
only mortgages depends heavily on the type of investment to
which they are linked, though they do not need to be linked to
an investment. Various lenders allow you to decide on how you
will repay the money at the end of the term. This may be appropriate
in circumstances where you have substantial investments that can
be used eventually to repay the loan. Or you may receive a future
inheritance
that will provide you with enough money to repay the loan.
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