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With an Interest Only Mortgage the monthly payments are lower than a repayment mortgage as they are made up of interest only. Therefore by the end of the Mortgage life the initial capital (actual money borrowed) will still be outstanding.
In order to pay back the capital amount it is necessary to investin an investment policy. This can be a life assurance policy or an ISA for exampole which is usually based upon the stock market. By the time the policy reaches the end of its term there should be enough money to repay the capital borrowed plus additional savings. Unfortunately there are no guarantees that the policy will do well over such a long time, and it should be noted that this sort of investment is normally untouchable until it matures.
Many lenders will now however lend on the basis of interest only without an investment policy having to be put in place. The lender is leaving the responsability for repaying the loan with the borrower and this may be by
1. An inheritance.
2. Sale of the house
3. Converting to repayment at a later date.
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