Is it worth that risk on an interest-only mortgage.
There are sort of three types of mortgages you can get for a house. There are more, but these are three of the main types. There are Fixed Rate, Variable Rate and Interest-only. We have spoke about variable rate and fixed rate mortgages in reasonable detail here.
But we have not always spoke about interest only. Its not as common, or as risk averse as the other two types of mortgages. So what is an interest only mortgage.
What an Interest Only mortgage is.
An interest only mortgage, like any other mortgage is a loan. Its a loan to pay for a house, so typically, you place down a deposit, than the lender looks at your credit history and financials and you get the mortgage. Difference comes in what and how much you pay back. When you get a mortgage there is a percentage that is placed on top of that mortgage. You may lend £180,000 for a mortgage but you pay back more, because like every loan, there is interest placed on it. This is often where lenders can be competitive, offering you better interest rates, or a certain percentage over a set period of time.
When you get a fixed rate or variable mortgage, you pay back a portion of the mortgage plus the interest. Is the different in an interest only mortgage? Yes it is!
Very simply on an interest only mortgage, you only pay back the interest part of a mortgage. This means you are not paying back any of the actual loan, just the interest part. So in theory at the end of the term of the mortgage, you will have not paid any of the actual loan part left. You will own no more or the property of what you put down as a deposit. So I hear from the rafters “That seems like a silly idea!”
Well there are some reasons to do it, but as always there are risks attached to it.
Here is your list of Pro’s and Con’s
- The repayments are low, much lower than if you were paying back another type of mortgage.
- If your house increases in value, and you can sell it, in theory you can make money off of the sale.
- Through inflation your debt depreciates in value over time.
- After the general term of your mortgage, you can move onto a Fixed rate or Variable rate, but you will have increase mortgage repayments
- If by the end of the term of your mortgage, you may not approved for another mortgage, then you quite large debt, or which, none has been repaid.
- Property prices may not have increased, so if you were looking to sell your property you may not be able to get what you lent back.
- Some people who take on interest only mortgages chose to add money into an investment or endowment, with the idea that this develops and gives you a lump at the end of your mortgage. But if this has not matured how you would like then you can struggle with paying the rest of the mortgage back.
Interest only mortgages are usually used for people wanting the develop property, low repayments, have it for a short time, develop it, rent it out for a few years and sell it at a profit. But with all business ventures there is a risk.
As always speak to someone you trust, make sure you understand what you are doing and why you are doing it.