What is an Interest Only Mortgage?
This type of mortgage allows the borrower to pay back any interest on the amount they have borrowed, however the capital (actual amount borrowed) remains outstanding. This means that although the interest only monthly payments are lower than their counterpart repayment mortgages, you will need to ensure you source another way of paying off the capital at the end of the agreed mortgage term.
These mortgages are ideal for buy to let investors, or residential property owners who like to take risks and would prefer to invest their money in Stocks and Shares, ISAs, Endowment Policies, Investment Bonds or the like. They can also be used to help individuals that have been hard hit by the current economic downturn, and need to save a little extra each month from their outgoings.
Due to the recent recession, mortgage market crisis and subsequent liquidity restrictions between banks, the majority of lenders no longer offer residential interest only mortgages any more. Those that still do now impose either very restrictive qualifying criteria or reduced loan to values.
Interest only mortgages have always been seen as a high risk strategy. This is because if you are unable to repay the loan at the end of the term for one reason or another, you would have to sell your home to repay the debt, this could mean you have to downsize to a smaller property if you have enough equity after the sale, or in a worst case scenario, you could potentially become homeless.
You should also be aware there is a greater chance of negative equity by selecting an interest only mortgage.
Why use a Broker for Interest Only Mortgages?
There are a number of advantages and disadvantages to this type of mortgage:
- Monthly payments are cheaper for interest only mortgages meaning you are less likely to fall in arrears to the lender
- If you take out an interest only mortgage, you can switch to a repayment mortgage when your financial situation allows for it
- If the interest only mortgage is for a buy to let property, there may be tax relief benefits
- Any additional money that you pay off each month, over and above your monthly payment, is put straight towards paying off the capital
- If property value increases to higher than the original loan amount, you will get a tax-free lump sum if you sell the property
- These can be used for short term relief from paying a repayment mortgage, to help through difficult financial times.
- You do not pay back any capital on an interest only mortgage, so the mortgage debt will never reduce over the mortgage term
- If your property value depreciates, you could end up in negative equity if you originally took out a high loan to value mortgage
- The original amount you borrowed will still need to be paid back
- Most lenders now ask for proof that you have a repayment vehicle in place to pay off the full loan amount
- It is becoming increasingly difficult to attain this type of mortgage on a residential property and the deposit required will need to be much larger at the outset
- If your investments do not provide you with sufficient windfall, you will need to find the difference from somewhere else to pay off your debt
- You won’t own your property at the end of the mortgage term, until you pay off the full capital owed
For the aforementioned reasons, it is therefore essential to speak to someone who can advise you on the most appropriate solution to suit your individual needs. Our mortgage brokers at JF Financial Associates are on hand to do just that! With years of experience behind them, there is no one in a better position to provide you with the right advice, allowing you to make an informed decision.
If you want to know more about Interest Only Mortgages, drop us a line on 0345 508 8588. You have nothing to lose and everything to gain.
JF Financial Associates will never sell you something you don’t want. We offer honest advice on what you need.