Interest Only Mortgages – Pros and Cons

We all know that mortgages can be paid in these two ways – interest only and repayments. Again, it is a well known fact that interest only mortgages are best for cheaper monthly repayments however, they are not the safest bet and many loan experts may advise you not to choose them. In case, you have an interest only mortgage then you only need to pay the interest on the amount of the mortgage and not the actual amount.

This proves quite risky and in extreme cases, it may end up in the repossession of your property. when considered over a loag period of time , interest only proves to be more expensive then repaymentsl. By paying smaller monthly repayments, you will have a peace of mind initially, but you need to be aware that it is doing no good to your actual debt. The debt remains intact and you will eventually have to find a way to pay it.

In some cases, to pay back the mortgage amount, you would sell your home or need to use the earnings from the sale of the property to clear the debt. Alternatively , you can consciously choose an investent or savings strategy that becomes equal to the mortgage amount when the term of the mortgage ends.

Eligibility for interest only mortgages:

To avoid any kind of unsustainable debts, the Financial Conduct Authority (FCA) has made certain ground rules. According to the FCA, a lender can offer interest only mortgages only when the borrower shows a convincing plan to clear the debt at the end of the mortgage term. It could be an authentic Individual Savings Account (ISA) or an investment fund, whichever is convenient for the borrower.

Main purpose of interest-only mortgages:

Well, most of the borrowers in the UK choose interest only mortgage for a buy to let property. They pay the rent they get to the lender and the property remains safe. Buy-to-let are also considered business loans and do not fall under the regulations set out by the FCA.

Interest-only mortgages prove quite cheap when the rents are high. Whatever the case may be, they are not the best idea for a long-term arrangement and the borrower should eventually switch to a repayment mortgage.

Another major benefit of interest-only mortgage is to gain profit by selling off the house when the house prices are high. With the money generated from the sale, you can pay back the mortgage as well as keep the profits. Naturally, if the house prices fall then you are at the losing end.

To sum up, interest only mortgages may sound tempting, but they can be a big pain if you cannot pay the actual loan amount. Unless you are buying to let and have a set plan and actual credentials to repay the mortgage amount, you should think twice before borrowing this kind of mortgage.

For more information on mortgages in the UK, you can read our mortgage guides or check our website freepricecompare.com for free, independent and impartial comparison between mortgage lenders or call our expert team of mortgage experts on 08008807656.

Written by

Kevin Patterson