Interest-Only Mortgages, Are The Right For You?
A lot of people are puzzled by interest-only mortgages. No wonder. This type of mortgage seems like a good deal because you have lower monthly repayments to make. This is because you are not making payments off the loan itself, also known as the capital or principle. But therein lies the potential problem for many people.
With a floating rate loan, you are paying off a portion of the mortgage with each payment. In the beginning, most of your mortgage payments are allotted to paying your interest; 95 percent or more mostly goes to your loan interest. However as you move into the loan period, a bigger proportion is paid off the loan until you reach near the end when there is only a small amount of interest compared to the principle repayment.
With an interest-only mortgage, at the end of the loan period, you have to pay off the total loan. Obviously this can be a big figure to suddenly produce for the lender.
Why do people take out interest-only mortgages?
There are many reasons for taking out such a mortgage.
For example, you may not be earning enough to make the payments on a repayment type mortgage. So the lower monthly outgoings can appear attractive, especially for new home buyers. If they can save money later towards the loan as their income increase, then the will be able to repay the lender.
Interest-only mortgages are also used by property investors. This is generally for three reasons. The first is that they want to keep their outgoings as low as possible to maximise the rental profit. The second is that often an investor can reclaim interest paid in their tax returns so keeping the interest element as an amount on its own makes accounting simple. The final reason is that often investors do not expect to hold a property for the full life of a 25 year mortgage. So when they come to sell the property, the tax and profit are easy to demonstrate.
Another reason people take out interest-only mortgages is that they perceive that over the life of a 25 or 30 year loan, inflation will reduce the nett effect of the loan so what seems a significant figure in the beginning will be relatively small at the end. Just think how house prices have gone up in the last 20 years and you can see how this might be the case for some people.
Interest rates
This type of mortgage can be either a floating rate or a fixed rate loan. You will need to think about how you see interest rates in the future to decide which of these options is right for you.
Should you take an interest-only mortgage?
For some borrowers, an interest-only mortgage can definitely be beneficial. We have seen that the monthly payments are lower than for a repayment type of loan. This could allow the borrower to invest the difference into a saving plan which will mature at the same time as the mortgage.
For others, the improved cash-flow helps their investment business.
If you do choose an interest-only mortgage, then you need to talk to a mortgage broker who will be able to advise on how you can protect yourself for when they loan is due for settlement.
After your research and careful consideration, you alone can know which ever type of loan is fit for you. Ask for advice from a mortgage broker.
Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Fixed-rate mortgages
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