What is an Interest Only Mortgage?

In short terms, an interest only mortgage is exactly what is says on the tin. It is a mortgage where your monthly payments are only the interest of your mortgage and not the mortgage itself. It means that your monthly payments are much smaller than if you were to pay back part of the mortgage and the interest each month.

Here is the catch though: when your mortgage ends, you have to pay back the full amount you borrowed. So if you've borrowed £150,000 over 25 years, during those 25 years you only have to pay back whatever the interest on your mortgage is. But at the end of those 25 years, you've got to somehow find that £150,000 you borrowed in the first place.  Remember, you haven’t actually been paying back the money you borrowed 25 years ago, just the money the bank is charging you for lending you the money.

For some people, this may be a good idea. One of my old co-workers has an interest only mortgage and as she is a contract worker, it seems to work out for her. That means that the months she’s out of work, she only has to pay back the interest, and the months she is working, she has the money to pay back more. She also rents out one of her rooms, so that contributes towards the mortgage as well. Her parents gave her the money for the deposit though, and in 2012, you need a rather large deposit to even get an interest only mortgage.

Understandably, the banks are really reluctant to grant them. Most of them will only give them to people who can prove that they can afford to make monthly repayments of mortgage and interest anyway.

Nationwide and Co-op have now completely stopped now. They are not granting interest only mortgages to any new mortgage applicants. Santander and HSBC are only granting them to borrowers who have minimum 50% deposit.

Source: www.bbc.co.uk

I think most other banks still have them, but they are difficult to come by and for a reason. Check with the bank you’re going with, if they still have them.

Personally, I wouldn't touch interest only mortgages with a bargepole.