Investment mortgage

How does an investment mortgage work?

An investment mortgage combines an interest-only loan with investing. Your monthly cost consists of interest on the loan plus a contribution to an investment policy. You make no repayments during the term; instead you invest towards a final capital sum. If returns go your way, you can use it to repay (part of) your mortgage at the end. It was mainly the choice of people who assumed investing would beat saving over the long run.

Important caveats

The investment mortgage has tumbled in popularity. Returns often disappointed and people wanted more certainty, so most providers no longer offer it. On top of that, a new investment mortgage no longer qualifies for mortgage interest relief since 1 January 2013, and you can usually finance at most half of the property value on an interest-only basis.

Pros and cons

Pros

• A chance of high final capital in good market years, with a relatively low contribution.
• The investment policy can often be taken to another provider.

Cons

• The final capital is not fixed: poor returns can leave a residual debt.
• No longer available as a new mortgage with interest relief.
• Policy and investment costs can significantly reduce the return.

Converting or refinancing

If you still have an investment mortgage running, you can often switch. Convert it to a savings or bank savings mortgage and you gain more certainty, though that usually comes with a higher contribution. Move to an annuity or linear mortgage and you actually start repaying. Do keep an eye on the costs: any early-repayment penalty, and the surrender value on expensive policies. Independent advice pays for itself here.