Frequently asked / common
questions about interest-only mortgages
Here are some of the most commonly
asked questions about interest-only mortgages.
Q: Let me get this straight.
If I take an interest-only mortgage, after 25 years of monthly
payments, I will still owe the same amount I did when I took
the mortgage, and until I pay that back my house could be
repossessed?
A: that's exactly right. All you will have
paid off is the interest your debt has accrued.
You
will not have made any contribution towards
paying off the capital sum (the amount you borrowed) and at
the end of the mortgage, you will be expected to clear this
in a single payment.
Q: What happens if I can't pay
off the capital sum at the end of the mortgage term?
A: If you can't find a source of cash to
settle this debt, you face the choice of taking out another
mortgage, selling your house or having it repossessed by your
lender.
Remember,
this is likely to happen just as you're approaching retirement
a time when most people aim to be free of debt.
Q: So how do I ensure I can
clear the capital debt?
A: You need to set up a repayment vehicle
as soon as possible and start saving regularly.
This
might be a stocks and shares Isa (individual savings account),
a cash Isa or another property investment you need to consult
an independent financial adviser to discuss what's best for
you.
But whichever you choose, fluctuating stock market returns,
interest rates and property prices will mean you can never
be certain of having enough money to pay off your debt.
that's
why it's far less risky and in the long run, cheaper to
go for a repayment mortgage.
Q: Interest-only mortgages sound
like the endowment mortgages my parents generation had. Are
they the same thing?
A: They can be. Endowment mortgages combine
an interest-only loan with an endowment policy to repay the
capital. Nowadays, most people consider these far too risky
to use as a repayment vehicle.
The
key difference though, it that mortgage lenders no longer
insist you have a repayment vehicle organised before they
will lend on an interest-only basis.
Many
people are taking advantage of this to cut costs by putting
off setting one up.
This is dangerous because the longer they
leave it, the harder it will be to save enough to clear their
debt, putting them at risk of losing their home.
Q: Can I start out with an interest-only
mortgage and switch to a repayment mortgage when Im earning
more?
A: You certainly can.
But
bear in mind that your monthly costs are likely to increase
significantly, as you will start repaying the amount
you borrowed when you make the switch.
And you will have a shorter time in which to do this than
if you'd been repaying it from the beginning of your mortgage
term.
Q: Ive heard it's possible
to get flexible interest-only mortgages, where you pay interest
each month and repay chunks of the capital sum whenever you
can afford it. Are these a good idea?
A: Flexible mortgages can be a very good
idea, provided you choose one that allows penalty-free repayments
and the terms and conditions suit you in other ways.
In
an ideal world, you would plough all your spare cash in, leaving
you debt-free years early and saving thousands of pounds of
interest in the process.
But
you do need to be disciplined and it's important to remember
that if things don't go as you hope, you will still have some
of the capital sum outstanding at the end of the mortgage
and you'll need to find a way of repaying this.
Q: Someone mentioned something called
a part and part mortgage as an alternative to going interest-only.
What is this and is it worth considering?
A: A part and part mortgage is a halfway
house between an interest-only loan and a repayment (capital
and interest) mortgage.
Part
of your mortgage is interest-only and the rest is repayment.
This
keeps the initial costs down, while reducing the total interest
bill and outstanding capital debt. To find out if it could
be right for you, read The
part and part mortgage.
Read on about Interest Only mortgages
Should
I choose repayment or interest-only?
How
to change from an interest-only to a repayment mortgage.
The
true cost of an interest-only mortgage
Frequently
asked / common questions about interest-only mortgages
Read
on
