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Interest Only

In general, with this type of mortgage, monthly payments to the lender are all interest. You don't pay off any of the capital during the term of the mortgage. Although, you can get a flexible mortgage which allows for "overpayments", allowing you to make lump sum capital payments as and when you can afford to. Most schemes these days allow you the flexibility to make at least 10% overpayments a year. But if your intention is not to make overpayments above the interest payments and to pay it all off at the end of the mortgage term - you need to ensure that you make monthly payments into some sort of investment vehicle. So each month you send one batch of money off to the lender, and another batch off towards an investment vehicle. By the end of the term, if your investments have worked out well, you should have accrued a nice pile of cash with which to pay off the capital sum of the mortgage, and maybe even a little extra. At least that's the theory. One way to do this is to buy a low-risk fund, such as an index tracker, and hold it within a tax-protective ISA. When the 25 years are up, you've already paid off the interest, and you simply hand over the relevant sum from your ISA to pay off the capital. Obviously it's important that you're sensible about the amount of money you put away each month into your investment vehicle. It is important to note that if there is a shortfall at the end of the term, it's your problem not the lenders. But it does mean that if your investments do well, you may be in a position to pay off the mortgage early or have a lump sum left over.

If you go down the interest only route, it's important that you monitor the progress of your investments as you may need to increase the amount you put away each month if they aren't growing as quickly as expected. If you do not feel comfortable with this burden then choose the repayment route.

Incidentally, it is possible to have a combined repayment/interest-only mortgage, which can be useful for those who want to increase their mortgage or who don't want to risk the whole of it on investing in the stock market.


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