An interest only mortgage requires you to make a monthly interest payment only to the lender, i.e. you do not repay any capital.  Unlike a capital and interest mortgage (commonly known as a repayment mortgage), an interest only mortgage does not reduce over time; you only repay the interest and the capital debt is as it was when you took the loan (assuming no additional borrowing).  It is your responsibility to ensure that you have sufficient funds to repay the capital at the end of the term.  This is usually achieved by utilising an investment vehicle, such as an endowment, an ISA or the tax free cash from a pension. 

If you decide to use an investment vehicle, you could potentially benefit from two situations.  Firstly, the investment could exceed the required amount and you would have a cash lump sum after you had repaid the mortgage; secondly, the investment could meet the mortgage amount sooner than required and you could repay the loan early.  The obvious potential drawback of this type of mortgage is that, in the event that you rely on an investment vehicle and it does not generate the required amount, you are left with a capital debt.  If the capital is not repaid at the agreed time, the lender could attempt to repossess the property.

It is not mandatory for a borrower to utilise an investment vehicle.  There may be alternatives such as switching the loan to capital and interest at a later stage, selling the property, relying on an inheritance and so on. 

We strongly recommend that you take professional advice to establish the most suitable arrangement for your circumstances, needs and preferences.