What is an Interest Only Mortgage?

This is an arrangement where you're only paying off the interest on the loan.

Unlike a standard mortgage you are not paying off the capital debt part of the mortgage.

Effectively this means that the mortgage costs you less which means you can borrow more.

But the idea that you can pay less is only a short term solution because you are supposed to set up a side by side investment because the capital debt part is supposed to have been repaid by the end of the mortgage term by your having made simultaneous monthly payments into a separate investment fund.

The idea is that this fund has hopefully grown enough to pay off the capital and leave you with a surplus.

To do this your mortgage salesperson may offer you an investment "side" or "by product" (i.e. what they'll claim is a suitable type of investment to pay off the capital part of the mortgage).

Before accepting anything always shop around for other deals.You may have heard of the endowment mortgage scandal where tens of thousands of people were left with a shortfall. That was a type of interest mortgage.

If you are thinking of going for an Interest Only Mortgage it might be beneficial to speak to an Independent Financial Advisor. Click here to see a list of Independent Financial Advisors in your area.

The majority of mortgage providers no longer ask for proof of an investment side/by product when confirming your mortgage.

You should be very clear that if the investment is not a success then you could lose your home - probably at the end of the mortgage term ie when you're close to retiring.