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The payment of the capital portion of interest only mortgages is deferred until the end of the term of the loan. Because interest only mortgages reduce the amount of the payments due to the lender each month, they are a popular vehicle for individuals to finance the purchase of their first home.
Interest only mortgages can help ease the financial burden involved with home ownership, allowing for borrowers to get a foot on the property ladder and switch to a repayment mortgage when it becomes more affordable. Interest only mortgages are therefore a short-term solution to the high cost involved in borrowing money to acquire property.
However at some point during its term the mortgage should be switched to repayment unless a successful Capital Repayment Vehicle (CRV) is in place. A CRV is an investment policy designed to produce enough money to repay the balance of an interest only mortgage at the end of its term. CRVs are usually found in the form of an endowment policy, an ISA-based investment scheme, or a personal pension plan.
Regardless of how the borrower is planning on repaying the capital portion of the loan, a level term assurance policy should be taken out when the interest only mortgage is established. A level term assurance policy will pay out a fixed sum upon death of the assured. The amount assured should cover the capital portion of the interest only mortgage.
Please contact us for more information on interest only mortgages.