Paying off your interest only mortgage

Steve Weisner - Independent Financial Adviser Radcliffe & Newlands

The payments on an interest- only mortgage are lower than on a repayment mortgage but that is because they only cover the interest due. Hence, at the end of the mortgage term, you will still owe the full original amount you borrowed. They can be good for those who believe their earnings will increase and can work well in times of high inflation, which can act to erode the capital sum over time, however, unless you want to lose your house at the end of the term, you have to find another way to make up and then pay back the money.

There are a number of options for repaying your loan, the first, and most obvious of which, is to sell the house and use the proceeds. This may work with buy-to-let or holiday properties, but is more difficult with your own home as you still need somewhere to live. You could also use a lump sum from elsewhere, such as an inheritance, but you need to be sure that this money will come through in time.

Most people opt for a savings product and, traditionally, endowment policies have been the most common option. Investors would take out a policy with a term tied in directly with their mortgage. These came with built-in life insurance and investors could add other benefits such as critical illness cover. They also had the advantage of being portable. However, when markets turned against them, they proved expensive and lacked transparency, particularly those linked to with-profits funds. Investors are now much more wary of the shortfalls.

The ideal savings product offers value for money, tax efficiency and low volatility over the long-term. With a time frame of 25 years, an investment entirely in cash is unlikely to help. You therefore need to be medium or high risk in your outlook as you will need at least some equities in your investment - though you could consider switching to less volatile investments as the expiry date draws near.

As a result, ISAs and unit trust savings plans have become more popular. The former has the advantage of being tax efficient and both are more transparent and flexible than endowments ever were. Shrewd investments may even leave you with an excess over what you need to pay off your mortgage although, as with any investment linked product, there is also the possibility that you may be left with less than you need. Hence, always ensure you know exactly what you are getting involved in – and if you can’t take the risk, perhaps a repayment mortgage will suit you much better.

To find out how you could reduce your monthly mortgage repayments, please speak to Steve where he'll be happy to help you.

Steve Weisner
Independent Financial Adviser
Radcliffe & Newlands
5th Floor Crystal Gate
28-30 Worship Street
London
EC2A 2AH  

Tel: 020 7382 0437
Fax: 0207 374 0462
Email: SWeisner@myeggnest.com
www.rad-new.com

If you have a question or if you would like to discuss becoming a client with Radcliffe & Newlands then do please complete the very short form on the right hand column of this page.

You will usually get an answer within 24 hours except during the weekend or bank holidays.

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