Interest only mortgages were once an extremely popular method of paying off a mortgage. However they reduced in popularity because more people became aware that only the interest was being paid off and a large sum of money would still be outstanding. In some cases interest only mortgages were billed as a way of saving a vast amount of money over a long period of time, but will all the benefits of a standard mortgage. This is simply not the case, and in fact it could be argued that interest only mortgages actually cost a lot more in the long run.

Like the name suggests, the only amount of money that is paid off using an interest only mortgage is the interest itself. This means that no money is actually paid towards the capital that is put down on a mortgage. In other words, when the mortgage loan expires you may be liable for a large bill for the amount of money that you have borrowed. Interest only mortgages are often sold as a great way to save money, but the reality is they are plagued by drawbacks. This simple guide will show you exactly how they work.

• An interest only mortgage is acquired.
• Only the interest is paid off, saving you thousands of pounds annually.
• At the end of the mortgage term a large sum of money is required as none of the capital debt has actually been paid off.

The reason as to why you eventually pay off more money is because you have not paid off any of the capital debt from the mortgage. This means that it has not been decreasing in size, and so you will have been paying higher interest payments. If you took out a regular mortgage than the capital debt would be decreasing, and so the interest rates would have been decreasing with it.

In an ideal situation the money that has been saved from the cheaper monthly payments would go towards paying off the lump sum after the mortgage term expires. However, this would require excellent money handling and budgeting skills, and it would still be more expensive in the long run.

Regardless of this some people still see this as a good option and are drawn to the cheaper instalments. This type of mortgage may only be beneficial for those who are confident that they have a way of paying off the capital debt after the mortgage expires.