As the name suggests, an interest only scheme allows you to opt to pay off the just the portion of your mortgage loan that represents the interest paid to the lender. In other words, when you have finished paying the interest only section you will still have repaid none of the capital - you will still owe the full purchase price of your home! Obviously you then need to set about paying off the actual capital amount.
So the interest only period is usually only a section of the mortgage period. Say you take out a thirty year loan, you might be able to opt for the first five or ten years as an interest only period, then you begin to pay the rest of the amount. At this point many people may be asking - Why Bother?
The main advantage of an interest only scheme is that the payments are lower during the period of interest only repayments than they would be with a standard repayment (the fully amortizing payment). Unfortunately, after this period the payments on your interest only mortgage are likely to be higher than the equivalent payments for a amortizing scheme.
So the people who will benefit from the scheme are those who would benefit from a significant period at a lower payment rate and are happy to accept and payment hike down the line.
There are two main groups for whom such a mortgage may appeal. The first is the first-time buyer. It is common for individuals and couples to go for something generally known as a starter-home. It is usually a stop-gap that is too small for a family and where the buyer has no intention of staying for long. The reason folk go for starter homes is the difficulty of meeting the payments when starting out in life. The problem is that every house move is very expensive with lots of fees and costs that are incurred in shifting up from the starter home. So sometimes makes economic sense to stretch the budget in the early years to avoid a costly move - the interest mortgages offer one route to achieving this because they offer lower payments whilst you get on your feet and get your career on the rails.
The second group that the interest only mortgage schemes may attract are those with variable incomes; the self-employed for example. This is because they can do without the big payment every month, but some months will want to pay more. This is the other key feature of an interest mortgage - you can make larger payments towards the capital sum when you have additional cash.
Those are the main advantages that make an interest only loan plan appealing. The potential problems are fairly obvious. First and foremost, you need to be confident that when the time comes to make the larger payments, you will be able to. Ask yourself quite seriously if this is a sure thing, do not rely on big talk and bravado. Do not risk your home if you are not sure.
If you are in the variable monthly income bracket, consider whether or not you are the kind of person who will actually make those bigger payments when you have the extra money. Will that new home cinema or red sports car be just too tempting... If you know you are going to have trouble disciplining yourself maybe you should go for a scheme that forces you to keep chipping away at the payment for your home.