By utilising an Interest Only Mortgage Loan, you reap the benefit of only paying the interest on the Mortgage for a set period of time, usually less than 10 years. This gives you the freedom to invest in other essentials whilst you are still able to. I you invest wisely you might even be able to better your financial position for the longterm.
After the set period of only paying the interest on the Mortgage Loan you then the prinicpal balance of the loan amount is amortized ( owed to the lender ) for the remaining length of the Mortgage Loan.
As an example if you were awarded an Interest Only Mortgage of which you were able to pay only the interest for 5 years and the total term of the Mortgage is set at 25 years, the remaining principal amount would be due within that remaining 20 years and you will pay your installments accordingly pro-rata the principal amount to the remaining term of the loan.
However you might find yourself in a postion where the mortgage carries a negative amortization.
Negative Amortization occurs when you pay an insufficient amount monthly to reduce the interest payments which means that the balance of the interest due is added to your principal loan amount.
Let's consider an example. Your mortgage loan amount is such that you need to pay £800 per month of which 90% of that amount is contibuted to reduce your monthly interest. Should you only pay a monthly installment of £ 700, it would result in a monthly negative amortization of £20, which would be added to principal mortgage loan amount. This is an unsuitable position to find yourself in.