Interest Only Mortgages: Ten Things You Need To Know

Posted on September 7, 2010
Filed Under Loans | Leave a Comment

1. Having an interest only mortgage will mean that you just pay the interest that has accrued on your property loan every month, as opposed to a common repayment mortgage where you repay a portion of the capital each and every month along with the interest to ensure that at the end of the term you will have paid back your mortgage wholly.

2. The total capital amount (i.e. the price you paid for your home) is still outstanding at the end of an interest only mortgage term therefore it has to be paid for through some alternative method.

3. For this specific reason interest only mortgages were in the past generally offered along with an additional product, such as an endowment plan, which is a product that you pay into once a month and which then invests that cash in the stock market. Hopefully, when your mortgage has reached its end, your endowment policy will end up being worth enough to take care of the outstanding capital that you have to pay back.

4. If you can’t manage to make the larger monthly payments of a repayment mortgage an interest only mortgages can be a very good way to get you on to the property ladder. Subsequently, when are a bit more financially secure you can change to a repayment mortgage and start paying down the debt.

5. In places where property prices tend to be high, interest only mortgages are worth considering because they can basically turn out to be less expensive than renting.  Nevertheless, you should always try to either switch to a repayment mortgage the moment you can or ensure you have some other plan for paying back the capital at the end.

6. Interest only mortgages are also a very good possibility for men and women who are self employed or who have irregular wages. In these instances the overall flexibility that comes with an interest only mortgage can be very acceptable.

7. Some loan companies are now providing the option of applying for a part interest-only and part repayment mortgage. This allows you to steadily reduce the interest only part.

8. Interest only mortgages find favour with property investors as the interest payments are tax-deductible. They do not intend to actually reside in the property, but, expect to gain from it either through an increase in its value or by getting rent of more than the interest payments and any other expenses.

9. As you don’t pay off any of the capital throughout the course of the mortgage, an interest only mortgage will cost you much more in the end as you are paying interest on the whole amount for the whole time. With a repayment mortgage your monthly payments are composed of a great deal of interest and just a little capital repayment at the start but the balance gradually shifts until you are primarily paying back capital with not much interest.

10. Lenders may ask for larger deposits as they think interest only mortgages are more risky than repayment ones. Also, they may charge a higher interest rate on interest only mortgages.

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