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How does an interest only mortgage work?
With an interest-only mortgage you only pay back the interest that you owe each month on the mortgage, not the money you borrowed itself. Some of the advantages of an interest only mortgage could include:
- Lower monthly repayments
- If your investment does well you might end up with spare cash left over after the mortgage has been paid off
- Interest only mortgages can be more flexible than repayment mortgages, so you might be able to adapt payments month by month to suit your financial situation
However, it is also important to be aware of some of the potential disadvantages of interest only rate mortgages, which can include:
You will still owe the full amount you originally borrowed at the end of the mortgage term. If you can’t pay it back, you could lose your property.
You will need to have a repayment plan in place to pay back the full cost of the property at the end of the mortgage term. This is usually an investment, and so your ability to repay will be dependent on the performance of the investment vehicle you have chosen.
Many mortgage providers won’t lend on an interest-only basis, because of the risk of negative equity due to future falls in property prices. You may need to be able to show that you have a particularly high deposit or a means of repaying the mortgage already in place.
Interest only mortgage rates can be harder to access in the first place unless you can provide a high initial deposit. If you have a lower deposit, a standard repayment mortgage may be a more feasible choice.
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