20 Feb 2015, 10:05pm

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  • IO

    Interest Only (mortgage)

    Like making the minimum payment on your credit card, only worse. If you borrow £100,000 at 5% and pay just the £5000 interest on your mortgage, then you never own any of your house. But obviously the repayments are cheaper, since paying down £100,000 over 25 years needs you to pay £4000 a year against the amount you borrowed.

    In the past you were expected to pay both the interest and the capital of a mortgage. At house price to earnings ration of more than 5 this becomes hard to do, and so the IO mortgage is born.

    Almost the only correct use of an IO mortgage is for an owner-occupier who realistically expects their pay to rise steeply in the next couple of years, or for BTL landlords to buy a BTL property

    Posts on IO mortgages.

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