Interest Only Mortgage

• A loan where no repayments of the capital borrowed is made during the term of the loan. The monthly payments that the borrower makes are only to cover the interest on the loan so the outstanding amount stays the same. At the end of the loan term, the whole amount borrowed must be paid back in one lump sum.

With this method it is necessary to consider how the capital sum will eventually be repaid. This is usually done by setting up a separate investment plan to pay off the capital owed at the end of the mortgage term. If the investment performs poorly or isn't kept up over the term of the mortgage there is no guarantee that the debt will be paid off at the end of the original term.

Because the monthly payments are for interest only, it is important when comparing the total monthly cost of an interest only mortgage with those of a repayment mortgage to include the money put aside as savings.