are 'interest only' mortgages a good thing?

[mommie]

Does anyone have one? how do they work? are they a good thing or will they turn into the next endowment mortgage scandal?

They're a Good Thing if you know you have the means to pay off the capital at the end of the term. If you knew you were coming into some money pre/at end of term and knew you'd be able to put it aside. But what if you want to move before then?

They can work for some people but they are incredibly risky as you are not paying off any capital so if you have a high interest only mortgage (with little equity in your house) and the house prices fall, you could be left with a large capital amount and a house that you can't sell at a price to cover the cost of the loan.

Having said that, an acquaintance of dh's bought a house around 10 years ago with a huge interest only mortgage (I think he had a very small deposit) on the off chance that the house prices would rise significantly. Of course they did and he made an absolute killing on the house and in the mean time had not sacrified his standard of living by having a monumental mortgage - but personally, I think he was lucky rather than well advised!

For some people yes, for others, no.

We have one, but it's a flexible one, so we can overpay on it if we choose to without penalty. We do overpay at the moment, because we have the funds to and it seems like the best way to invest our income. Not sure how we'd pay it off otherwise.

Would definitely recommend that you take out life insurance for all parties for the full sum if going down this route. If anything happened to DH I'd have real difficulty ever paying it off. Hence we've taken out critical illness insurance too, in case he was unable to work due to something serious.

thanks - am still not sure how exactly they work. Say you buy a property for £300,000 and put down a 10 per cent deposit. what happens at the end of the day if you have just been paying off the interest on the mortgage? is the house ever yours? and how much for?

and good point Tinker; what happens if you want to move again?

Endowment mortgages are effectively interest only mortgages with the endowment being an investment to pay off the capital (great in theory if your investment "endowment" pays out)

With an interest only mortgage you must have a way to repay all the capital you borrowed at the start, where you find the money is up to you in theory

Here is a link to the Fool mortgage

good website explanation - tks

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