All You Need To Know About Interest Only Mortgages
So you have started to look for a mortgage to finance a new home you wish to buy, or are perhaps looking to switch from your current mortgage to one that works a little differently, you will most likely have come seen some mortgages called interest only mortgages. This kind of mortgage is where you only pay the interest for the duration of the mortgage, 25 years if you have elected for a 25 year interest only mortgage. If you are looking to minimise the monthly payments of your mortgage then this could be the right kind of mortgage for you, as long as you are aware of the pros and more importantly the risks of interest only mortgages.
The Pros of Interest Only Mortgages
The most apparent benefit of an interest only mortgage is that you are only required to make payments for the interest on your home loan, therefore monthly payments are substantially lower than what they would be on a repayment mortgage where you must pay back the capital and the interest every month. Given the fact that mortgage interest is only a small percentage of the total financing cost, then that shows in the lowered monthly payments to your bank/building society. This gives you more money to play around with each month, which if you have just purchased your first home can make all the difference, after all you need to fill that house with furniture!.
An interest only mortgage also allows you to make better use of that extra money. For example, you could put it into a high yield savings account, or the stock market, or even another property that you could then let to help finance your main home. This would then give you an additional monthly income, which you could then transfer to a high interest savings account to pay for your mortgage at the end of the mortgage term.
The Disadvantages of interest only mortgages
As with many things in life where there are pro’s there are also potential drawbacks you should be aware of.
Not all that glows is gold and the main advantage of an interest only mortgage is also its main drawback. As you’re only paying the interest part on the loan, then when the end of the mortgage period comes round, you still have the entire original sum to pay!. Unless you’ve successfully generated that amount by the end of your mortgage period by some form of investment you could find yourself with nothing to show for all your years of interest paying most likely just before you retire, very bad if an investment turns sour towards the end!.
Should you be prepared to take this fundamental risk and go for an interest only mortgage, there are safer ways than the stock market that you can use to help prepare yourself such as a regular high interest savings account, sell another valuable asset, use an inheritance you may find yourself coming into. As you can see it’s important for you to be sure you understand what you are getting into when signing up for interest only mortgages, a mortgage adviser could help you decide if an interest only mortgage is the right way for you to proceed.
