Interest Only Remortgages
Interest only remortgages are associated with a number of myths, but in truth, these can be the best home loan or debt consolidation products a borrower might consider. One can define an interest only remortgage as a loan that allows borrowers to pay only the interest incurred on the balance for a part of its term. At the end of this “interest only” period, borrowers are given the option of converting the loan into an amortized loan, in which the monthly repayments include interest and principal.
UK Interest Only Remortgages
In the UK, home owners usually consider interest only remortgages to purchase assets that are least likely to diminish in value and can, therefore, be sold at the end of the interest-only term to pay off the principal. In the eighties and the nineties, many homeowners in the UK borrowed interest-only loans to purchase houses to let.
During those years, the product was associated with an endowment policy and lenders convinced borrowers that they could use the endowment policy to pay back their principals. Unfortunately, these endowment policies were badly managed, leading to loss and disappointment for thousands of homeowners. Ever since, UK homeowners take interest only remortgages associated with endowment policies, also known as endowment mortgages, with a pinch of salt.
Common Features
Mortgage lenders offer a wide range of interest only remortgages, of which the most common variety is the type that permits borrowers to pay only the interest for a particular period of time. At the end of this interest-only period, the loan is converted into an amortized loan, in which borrowers need to make monthly payments towards both principal and interest. Contrary to popular beliefs, however, the principal remains unchanged when the loan is amortized and only the monthly payments will increase.
Interest only remortgages come in 30-year or 40-year terms. If you opt for a 30-year product, you will have to pay the interest only for the first five years of the loan term; and if you opt for a 40-year product, you will have to pay the interest only for the first 10 years of the term.
Advantages and Disadvantages
Interest only remortgages do not make it mandatory for home owners to pay the interest only, but only gives them the option to do so. This makes it ideal for home owners who are on a tight budget to pay only the interest for the first few years of the term, especially when they are faced with unexpected bills. These products are also ideal for those who do not have a fixed income; they can take the interest-only option if they are unable to earn much during a particular month.
However, interest only remortgages are much more expensive than other mortgage and remortgage products in the market. This is because lenders like to gain a profit for offering that alluring interest only option.
Since interest rates vary just as lenders and their products do, home owners hunting for an interest only remortgage must shop for the best deals.