Interest Only Mortgage - What Is An Interest Only Mortgage & How Does It Work?

An interest only mortgage is where during the term of the interest only mortgage, you only pay back the interest in the monthly repayments. It is up to you to pay the capital of the mortgage at the end of the mortgage term. In order to repay the capital at the end of the interest only mortgage term one would normally set up some kind of investment (usually an endowment insurance policy with an investment element to it) which would build up over the years and should be in enough to repay the capital of the interest only mortgage, although there is no guarantee that the investment will be enough money to completely pay off the mortgage capital.

The other type of investment used to build up the funds needed to pay off the capital of an interest only mortgage is an ISA account which has the advantages of being tax free and has much easier access to the funds than an insurance based investment normally does.