Repaying an Interest Only Mortgage

by Mark Johnston

Many brokers reckon that interest only mortgages will now struggle to make a comeback.

Interest only mortgages are becoming an endangered species as the Financial Services Authority (FSA) views them as being much riskier than repayment loans.

The Financial Service Authority (FSA) has warned that home buyers who takeout interest only mortgages are storing up problems for the future as they have little idea of how they will pay back the loan at the end of the term.

There are many people who are now in debt due to interest only mortgages. These people took advantage of attractive offers to ‘buy now and pay later’, but then lacked the foresight and will power to do so.

Melanie Bien, director of mortgage brokers Savills private finance said “in recent years, an increasing number of borrowers, particularly first time buyers, have taken out interest only mortgages with no investment vehicle as a way of being able to afford the mortgage payments”.

Experts warn that borrowers who never pay off their debt are simply renting from the lender instead of a landlord.

The Halifax previously only asked borrowers if they had a vehicle in place before a mortgage was offered, no actual proof was given. However they have now announced the end of interest only mortgages without documentary evidence of how the loan is going to be repaid.

Many lenders allow borrowers to repay interest only mortgages using endowment policies, ISA’s, pension schemes, shares, savings or the sale of a second home.

Endowment policies:

An investment vehicle that provides life insurance and also funds to repay the loan at the end of its term (usually 20-25 years).

In the 1980’s these policies were very popular and heavily marketed by lenders. Many borrowers were promised that the policies would not only pay off their mortgages but also provide them with a lump sum too.

Most borrowers were not told of the investment risks and this led to huge claims for compensation due to them being miss-sold.

As a result of this endowment policies have declined in popularity and very few are now sold.

Individual savings accounts (ISA):

These were introduced relatively recently (1999), these are a tax free method of saving through an investment. The ISA works in a similar way to the endowment policy; therefore there is no guarantee of the investments performance.

The value of the investment may increase or decrease depending on the market.


Payments can be made in to a savings account each month to builds up a lump sum to pay off the mortgage at the end of the term.

However the returns offered by banks or building societies are usually too low for them to be used to pay off the capital on their own.

Pension plan:

Monthly payments are made into a pension fund, when the benefits are eventually taken the mortgage is repaid using the tax free lump sum offered.

This product tend to be only be used by the self employed.

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