An interest only mortgage is designed to only pay off the interest that accrues against the mortgage. This means that the monthly repayments are much lower than a capital and interest mortgage. However, at the end of the term the original loan value has not been paid back. It is often suggested that you need a vehicle to saving during the term of the mortgage to pay back the original capital. One thing you must take into account is that £100,000 today will be a lot less in 25 years. Meaning if you mortgage £100,000 today over 25 years on an interest only mortgage you would have to pay off the £100,000. However the £100,000 in 25 year time will not be worth the same in today’s money. This is due to inflation and is called the net present value or NPV.

So the amount you nee to save over the 25 years is still £100,000 but it is a lot easier to save that money in the last 10 or so years of the mortgage term. Remember that the mortgage will not be fixed for he 25 years. Meaning you can change the mortgage to fit with you resent circumstances. Most people change the mortgage provider every 4/5 years. It is the shopping around and moving the mortgage to a better deal each time that can save people a lot of money.

Type Of Mortgages