Why Take Interest Only Mortgages?
An interest only mortgage is a type of mortgage that allows borrowers to pay only the interest accrued on the loan for a specific period of time. At the end of the interest only term, borrowers can pay off the principal or remortgage the loan to a repayment mortgage, depending on the options presented to them by their mortgage lenders.
Why Take Interest Only Mortgages?
In the UK, an interest only mortgage is an ideal way of borrowing funds to purchase a home that can be sold at the end of the term to pay off the principal. For instance, most property purchased with the intention of letting are purchased on interest only mortgages.
In the eighties and the nineties, UK residents usually purchased homes on interest only loans combined with endowment policies, commonly known as endowment mortgages. Mortgage lenders and brokers marketed the product to aspiring homeowners by telling them that they could use their endowment policies to pay off the principal while they pay off the interest as monthly payments. Unfortunately, these endowment policies did not even fetch in the required funds to pay off the principal, which made them very unpopular.
In today’s UK mortgage market, interest only mortgages have a poor reputation; however, they can turn out to be the best mortgage products depending on individual requirements.
Monthly Payments
If you have taken an interest only mortgage, you don’t have to pay off the principal in your monthly payments; however, the monthly payment amount depends on the type of interest only mortgage.
The best interest only mortgages allow borrowers to make interest only payments only for a limited period of time, usually the first five or ten years of their mortgage term. At the end of that period, borrowers are required to pay the principal plus interest in their monthly payments.
Advantages of Interest Only Mortgages
Interest only mortgages are ideal for first-time buyers, who struggle with their monthly payments because they are not used to it. The low monthly payments, which comprise only the interest accrued on the principal, help first-time buyers get used to concept of paying off mortgage loans.
Simultaneously, borrowers must understand that interest only mortgages do not waive off the principal borrowed; the principal very much exists and has to be paid off sooner or later. Interest only mortgages do not make it mandatory for homeowners to pay only the interest in their monthly payments; instead, they only offer homeowners the option to pay only the interest during the first few years of the term.
Interest only mortgages, therefore, are ideal for borrowers who do not have fixed salaries, but earn bonuses or commissions according to their work performance. They are also ideal for those who work and earn on a freelance or contract basis or for those who are self-employed. According to the terms and conditions of their interest only mortgage deal, they can pay only the interest when their income is low and make larger payments when they are earning more.