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Interest Only Mortgages, To Amortize Or Not?

Tim Worstall
LoanBiz Columnist

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Interest only mortgages can be worthwhile: but don't forget that you still have to amortize the loan.

An interest only mortgage will reduce the amount of your monthly payments and as such can be an extremely useful technique to help you get the house you want. However, you do have to remember that because you are using an interest only mortgage you will still have to find some way to amortize the loan. Amortize is just the fancy financial world jargon of saying "pay off". In a regular mortgage you make only one payment a month, that is true, but that payment is split into two parts by the mortgage company. First is the interest you owe for that month, and then an additional amount is used to repay the capital or principal of the loan, or to amortize it. With an interest only mortgage you are not making that second payment, which is what makes it cheaper, but you do still need to think about how you will amortize or repay the loan at some point.

What methods are there to amortize an interest only loan?

It could be that you are expecting a promotion or a pay rise and so you'll start to amortize your interest only mortgage in a year or two. Or perhaps you'll put that extra payment you are not making into another type of savings scheme, like a pension.  But it is important to understand that if you don't amortize, if you don't pay off the capital of your interest only mortgage, then at the end of the loan you might have to sell the house to pay back what you borrowed.

About the Author
Tim Worstall has a degree in finance and accountancy and writes extensively on matters economic and financial.

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