With an interest only mortgage, your monthly payments to the lender only pay the interest charges. The actual mortgage balance - the amount borrowed - does not reduce.

This means you must repay the capital part of your loan at the end of the mortgage term. To do this, you put money into a separate investment. This should grow and enable you to pay off the mortgage when required to do so.

The bad publicity surrounding endowment policies recently has put many people off using the stock market for their mortgage capital payment. This is due to the poor performance of the stock market, causing investments which are maturing now to under perform.

However, provided the growth assumptions for an investment are cautious, there should not be a problem. The problems now were mainly caused by high growth assumptions in the late 1980s. Historically, the stock market performs well over 20 to 30 year periods, so slow periods of growth should turn around.

Advantages

If your investment performs better than expected, you can have a cash surplus left after paying back the capital.

You need only make one payment each month to cover your investment, life insurance, mortgage and protection needs, instead of four payments to four different companies all sourced by you.

It is fully portable when you move home. Your payments will go up if you are trading up but the term will be unaffected.

If you know that you will be in receipt of a trust fund or inheritance which could pay back the capital, you need only pay the interest, making these monthly payments your only outgoing expense.

Disadvantages

They are a higher risk than a repayment mortgage. There is no guarantee that your investment will cover your capital repayment and the lender will want full payment on a specific date.

You pay interest on the full capital amount for the whole life of the mortgage, making it expensive in terms of interest payments.

Plans are complicated and need to be understood before investing, making professional advice essential.

If you are unhappy with the performance of your plan, it is difficult to change them due to the penalties involved.