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Interest-Only Mortgages
With an interest-only mortgage, the payment you make to the
mortgage lender each month comprises just the interest you owe
them for that month. So you are not paying off any of the capital
you owe.
When you take out an interest-only mortgage, you are
supposed to also make a monthly payment into an Individual Savings
Account, endowment or other investment. The hope is that the
investment will then generate sufficient returns to pay off the
capital sum you still owe at the end of the mortgage term.
However, there is no guarantee of this, so any interest-only
mortgage carries an element of risk.
In recent years, increasing numbers of first-time buyers
have taken out interest-only mortgages, and have just paid the
interest - not paying any money into an investment. With high
house prices, this is the only way some people have managed to
afford to buy property. When taking out an interest-only mortgage
and just paying the interest, they are relying on their property
going up in value, being able to sell it a few years down the line
for a profit, and then buying a property with a repayment-type
mortgage.
Mortgage Risks
 There are a number of risks here. Firstly, house prices are not
guaranteed to go up, and could even fall. Secondly, many people
sort out their mortgage and then forget about it. If you never get
around to converting your interest-only mortgage to a
repayment-type, and you have no investment fund building up, there
is a very real risk that you may get to the end of your 25 year
mortgage term still owing all of the capital initially borrowed
and with no way of repaying it.
Repayment-Type Mortgages
With a repayment-type mortgage, the monthly repayment you make
to the lender each month consists of the interest you owe plus a
little bit of the capital you owe. If you keep up all the
repayments on your mortgage, you are guaranteed to have paid off
the mortgage at the end of the term. Repayment-type mortgages are
therefore the safest option, and are by far the most popular
mortgage type in the UK.
Buy-to-Let Investors
Buy-to-let investors are the only borrowers who are advised to
take out interest-only mortgages with no investment vehicle. That
is because the rent covers your interest payments, and the long
term plan is generally to sell the property in the future, and pay
off the capital at that point. |
For more information or to discuss your particular
requirement, click here to contact us. |
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