With an interest-only mortgage, borrowers only pay back the interest on their mortgage each month. The initial value of the loan does not have to be repaid until the end of the mortgage term in the UK.
To cover the final lump sum mortgage holders are advised to contribute regularly to long-term investments, in addition to making mortgage repayments. These investments can come in the form of an ISA, an endowment policy, a pension, or any other venture that is expected to experience the required levels of growth.
There is a certain amount of risk involved with any form of investment, and it is for that very reason that some people prefer to opt for a repayment mortgage rather than an interest-only mortgage. Here, the capital is repaid alongside the interest, and so total settlement of the loan is guaranteed at the end of the mortgage term.
However if you are not averse to a certain amount of financial risk, and like the idea of taking out long-term investment with a view to potentially making a profit, then it may be worth your while looking a bit further into this possibility.
Below is a brief explanation of some of the more common forms of investment that people take out with a view to repaying their mortgage:
An endowment policy is a long-term investment and its growth relates to and depends upon the performance of the stock market. This type of investment has received a lot of attention lately because many people depending on their endowments to pay off mortgages are finding that their fund is simply not worth enough. To try to avoid such shortfalls, anyone considering taking the plunge is advised to regularly check on the value of their fund and to take out additional investments or savings if necessary.
ISAs, PEPS, and Pensions
These areas of investment are becoming increasing popular, and offer investors a tax-efficient vehicle in which to invest their money. They work in much the same way as an endowment mortgage, except that instead of paying into an endowment fund alongside regular mortgage payments, money goes into an Individual Savings Account (usually a stocks and shares ISA), or a pension scheme. Pre-1999, investors also used PEPs (Personal Equity Plans) to supplement any mortgage payments, but these have now been done away with in favour of ISAs. The rate at which these funds grow is based on stock market performance, and there is therefore no guarantee that they can be used to fully repay a mortgage.