Interest Only Mortgage
Like the title suggests, an interest only mortgage allows you to repay only the interest on the mortgage and not the principal. Instead, the capital is either paid in full at the end of the mortgage term, or after an interest only period of say 5 to 10 years, the remaining mortgage is amotrized over the remaining term. If you plan to repay the mortgage off in full at end of term, you must ensure you will have the funds to do so, through either investments or a pension plan for instance. More...
Interest only mortgages are on the rise but they do come with considerable risks. The most obvious one is being unable to afford repayments once the interest only period expires.
Interest Only Mortgage Advantages
The benefits of an interest only mortgage can be compelling; interest only mortgages usually have a lower monthly repayment than a principal and interest mortgage plan.
An interest only mortgage option allows you to pay into an investment fund with the aim of paying the capital of your mortgage out of your earnings. The risk factor, however, ensures this repayment plan is not for wishful thinkers but people who know they will have additional funds at a specific time in the future. If investment presents too much uncertainty you will need to make separate arrangements to pay off the loan when the mortgage ends.
Interest only mortgages may appeal to those re-mortgaging or first time buyers who cannot initially afford a repayment mortgage. In fact, some lenders now have a specially designed mortgage products, which allows first-time buyers to transfer to a repayment mortgage scheme. You should always find out the fee for transfering before you agree to transfer.
Interest only mortgages are a way in which first time buyers can afford to decorate and make purchases for their new home if alll their savings have been spent on the down payment.
Warning
Never bank on the value of your property increasing to such an extent that you can make a sale, pay off your mortgage at end of term and move on with a nice profit. Property prices are too unpredictable and an interest only mortgage should never be obtained on this basis. Also, always calculate how much you will be repaying when the interest only period ends because if you can’t afford the home now chances are you won’t be able to at a future date.
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