Mortgage Broker Belfast

  INTEREST ONLY MORTGAGES

Imagine making mortgage payments for 3, 5 or even 25 years and never reducing your debt by a penny. Many homeowners might regard such a scenario as a nightmare and would never even consider taking out such a mortgage under any circumstances.

There are though times when this type of mortgage could be the sensible option. It can for instance; help young couples buy expensive homes early in their careers and allow others to acquire buy-to-let rental properties.

Lenders call them "interest-only" mortgages, but the term isn’t strictly correct. Eventually the “capital” or debt has to be repaid, too, but most borrowers plan to do that by reselling the property a few years down the road. The loans work like this: a buyer takes out a mortgage for a term of years but the buyer pays only interest on the borrowed money and nothing towards paying of the original amount borrowed. That results in monthly payments that are considerably lower than those required for a conventional capital & interest (repayment) mortgage.

Back in the late 1980’s and early 90’s Interest only mortgages were all the rage. They were heavily sold, as the fashion was to pay into an Investment plan, usually an endowment policy in those days, to repay the capital when the policy matured. Endowments paid very large commissions to the seller of the policy hence they were strongly promoted when they may not have been in the best interests of all the people that took them out. The stock market returns in recent years have meant that endowment policies have massively under performed so most that were sold within the last 10 years are unlikely to payout enough money to repay the original amount borrowed leaving significant shortfalls.

The consumer has to be careful when considering an interest only loan and should really take advice from a professional mortgage broker. Interest only loans can be advantageous for an investor who plans to buy a house or flat to rent out for a few years and then sell at a profit. This type of mortgage means there will be more money left for them from the monthly rent payments.

Another likely client for an interest-only deal is the young, upwardly mobile couple starting a family. The low payments in the early years of the loan allow them to buy a larger house than they normally could afford on just one income. If they know the wife will go back to work in a few years, this might work well for them. Another time you could consider interest only, is if you are planning to move house every 2 or 3 years. Within that period of time if you'd opted for a repayment loan, you would not have reduced the capital debt by much in any case as the payment to the lender although made up of capital and interest, will be mainly interest in the very early years.

Most mortgage brokers though are very selective about recommending interest-only loans, due to the risks involved.