Interest-Only
Mortgages Concerns – Opportunity or Trap?
There
have been a number of major financial mis-selling scandals
in recent years endowment
mortgages, personal pensions and payment protection
insurance are just three examples.
Some experts are becoming concerned that, before long,
Interest-only
mortgages could join that list.
So before committing yourself to this type
of mortgage, it's essential to know all the facts.
Here's Your Quick Guide
How
Do Interest-Only Mortgages Work?
What
Else Do I Need To Know?
Do
All Lenders Offer Interest-Only Mortgages?
Are
Interest-Only Mortgages New?
Interest
Only Mortgages - The New Endowment Mortgage?
Things
to Consider
What's
The Future For Interest-Only Mortgages?
Frequently
Asked Questions
How Do Interest-Only Mortgages Work?
Interest-only
mortgages work on a very simple
principle: you borrow a sum (known as the capital) from
your mortgage
lender and each month you repay only the interest
due on this debt.
Because you are not repaying any capital, as you would
with a standard repayment
mortgage (also know as a capital
and interest mortgage), the monthly payments are considerably
lower than they would otherwise be.
However, at the end of your mortgage
term (typically 25 years, but
it could be longer or shorter) you still owe the capital
sum.
The idea behind this type of mortgage is that you have
a separate savings or investment plan running alongside
it, into which you also make monthly payments.
This repayment vehicle, as it's known, could
be an endowment policy, an investment fund, another
property or perhaps a pension fund.
There are pros and cons to all of these well, in the
case of endowments and pensions only cons.
No matter what anyone tells you, no investment is guaranteed
to provide the cash you need to clear your debt even
another property could lose value if the market drops.
So, while an interest-only mortgage allows you to benefit
from lower monthly payments, it will always be a risky
choice.
If you can't pay off the capital sum at the end of the
mortgage term, either because you haven't set up a suitable
repayment vehicle or because it has underperformed,
you will need to find another way to settle your debt
or risk losing your home.
This is the gamble that you take with an interest-only
mortgage.
What Else Do I Need To Know?
Although
the lower repayments required by an interest-only mortgage
can make getting on the property ladder more affordable
in the short term, the long-term costs are generally
far higher than for a repayment
mortgage.
There are several reasons for this:
With a repayment mortgage you are gradually paying off
the capital debt. This means that as time goes by, you
owe less and so are charged less interest.
For example, someone with a £150,000 interest-only
mortgage at 6 per cent interest would pay £750
a month giving a total bill of £225,000 over 25 years.
Of course, they would still owe the original £150,000
which means they would have to repay a grand
total of £375,000.
However, someone taking the same mortgage on
a repayment basis would pay £966.45 a month,
made up of capital and interest.
By the time the 25 years were up, they would be debt-free
at a total cost of just £289,935.
In other words, going interest-only would have cost
an extra £85,065.
And because the interest bill is so much higher than
for a repayment mortgage, interest rate rises have a
bigger long-term impact on interest-only mortgage holders.
What's more, if your repayment vehicle doesn't perform
as well as you hope, you could end up having to borrow
from elsewhere to make up the difference or switch to
a repayment basis quite late on in the term of your
mortgage, increasing your overall costs.
To avoid being caught out by issues like these,
it's vital that you fully understand the mortgage you're
taking and have a sensible repayment plan in place right
from the start.
If in doubt, talk to an independent financial adviser
and make sure they explain all the options to you.
If there's anything you don't understand,
never be afraid to ask when it comes to mortgages
and investments, there's no such thing as a stupid question.
And if your adviser makes you feel there is, ditch them
and go to one who doesn't talk down to you.
Remember: you're doing them a favour by
offering them your business.
Read
On...
Do
All Lenders Offer Interest-Only Mortgages?
Are
Interest-Only Mortgages New?
Interest
Only Mortgages - The New Endowment Mortgage?
Things
to Consider
What's
The Future For Interest-Only Mortgages?
Frequently
Asked Questions
Types
Of Mortgage
Brief
intro
The
two major varieties:
Repayment
mortgages
Interest
only mortgages
Then
mix in the various:
Interest
repayment arrangements
Finally,
to cover all the different types there's a
Complete A-Z of mortgages
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