What is an Interest Only Mortgage Loan?

What is an Interest Only Mortgage Loan?

An interest only mortgage is when a borrower only pays the interest rates and nothing is paid on the capital for a stipulated term and only repays the interest and not the capital borrowed. A separate repayment plan such as an ISA has been set up in order to repay the capital at the end of the mortgage term.

For first time home buyers, an interest only mortgage can be of great help, however you need to consider the repayment vehicle. You have to decide if an interest only is better than a repayment mortgage. The advantages of an interest only type of mortgage is a way of ensuring lower mortgage payments as it is difficult for first time buyers to save enough as a down payment for a home as well as get onto the property ladder. It is more important to keep ones cost as low as possible, especially for those just starting out.

Another advantage is that mortgage payments are far lower and one does not have to pay off the capital over the mortgage term which makes these mortgage payments lower. Owning your own home is far better than renting a home as one will benefit from the long term appreciation as opposed to renting which is actually dead money.

Another advantage is that one can change to a repayment mortgage at a later date as opposed to initially struggling with high monthly repayments. As you progress and start climbing the corporate ladder, you’ll have the option to switch to repayment mortgage. Buying a home is an investment and when you take out a mortgage such as this, it is purely for capital appreciation purposes.

The downside is that the repayments are rather stiff in the short term due to capital payment but in the long term the person will own their own home. You need to also set up a repayment vehicle in the form of a lump sum pension payment or SA and this has got to be done although it may not cover the amount borrowed so you may have to choose a repayment mortgage.

In a falling property market those that have an interest only mortgage will experience a negative equity and there are far fewer lenders when it comes to these mortgages, and they need to see that a repayment vehicle is firmly in place before they will even consider a loan.