Interest only mortgages are a popular choice but you need to fully understand how do interest only mortgages work so you can decide if they're the right option for you, and if so find the best deal.
The reality is that interest only mortgages are actually one of the more simple types of mortgage.
Essentially they are a bit of a “does what it says on the tin” mortgage in that your repayments pay off the mortgages interest only.
The alternative is a repayment mortgage where your monthly repayments are used to pay down your mortgage borrowing as well as the interest on your debt.
The main benefit of an interest only mortgage is primarily the fact that it allows you to pay a smaller amount each month in return for owning your own home. It's for this reason that this type of mortgage is so popular with first time buyers.
The main drawback of an interest only mortgage, and one that you must consider before you apply, is that even if you make every single one of your monthly repayments, you'll still owe the mortgage company the full amount you borrowed at the end of your mortgage term.
This is because your repayments haven't been paying down the capital, simply servicing the interest on the loan. As such, you'll need to find an alternative means of settling your mortgage debt.
The most common way to do this is to save or invest throughout your mortgage term so you have the money available.
An alternative is to take out a deal with the best interest only mortgage rates for a short while and then, when you're in a better financial situation, switch to a repayment mortgage so that you're paying down your borrowing too.
Understandably, when looking for the best interest only mortgages the majority of people will look for the lowest interest rates first.
However, it is important to remember that these are not the only thing that should be considered because the terms of the agreement will differ with each mortgage provider and the importance of these should not be underestimated.
When you factor in any additional potential charges associated with your application for interest only mortgages or punitive payments should you wish to start paying off all or some of your outstanding balance early, the interest rate you originally thought was a good deal could actually leave you paying more than other slightly higher mortgage deals.
