What's the point in an interest only mortgage?

Caleb11

When applying for a mortgage I was asked if I wanted interest only or repayment and a few others have asked me. Repayment means you pay towards some of the loan plus u pay interest with your monthly payment... So what's the point in interest only? Is it not basically the same as renting as you'll never ever fully own the house? When you go to sell you won't profit at all will you? Yet you will have paid interest every month? I see the point if your going through a couple months of difficultly and want to reduce the price temporally but a 25 year mortgage interest only -Can someone exlain

jaxjax123

Hi

From what I know They are a lot cheaper but you have to get something like a endowment policy, which you hope will pay off your mortgage. My first mortgage 15 years ago was interest only. I only had it a couple of years.

ramjug

I am no good in this housing thing but as i can understand, when you are paying rent. Money goes into Landlord pocket(one-way street). Now suppose you buy a house on for 200,000 and suppsoe your monthly 'interest only' payment is same as the rent you were paying.

Now after a year, you are selling your house for 210,000. You profit that 10K which otherwise (if renting) would have never made. You can agrue that price could have gone down too, thats a another story.

Jibjab_2

You can still profit from an interest only mortgage as the price of the house could go up.

Its also useful for if you stretch yourself a little but think you may have more income later in life and would be able to get the house you want now as you only pay the interest, then later when you earn more, switch to a repayment or repay a little extra per month.

I currently have a part repayment part interest only mortgage, the months I have spare cash I pay extra off but having the interest only mortgage also gives me the flexibility of having spare cash every month so if something goes wrong with the car for example, I have the spare cash to fix it as its not committed to the mortgage already.

I believe interest only mortgages are also popular with buy to let investors.

Personally i'd only take an interest only mortgage if it offers the flexibility of paying off some of the capital whenever you want

BitterAndTwisted

Buyers are gambling that the increase in property prices will pay off their mortgages at the end of the term when they come to sell.or they have some other investment strategy to become mortgage-free. This was all very well when prices were increasing at a rate of knots. Some friends of mine "bought" a very large property on an interest-only mortgage for about £95k over a decade ago. It's now worth at least five times that, maybe much more

DominicJ_2

I'm on an interest only mortgage, its £150 cheaper than the repayment mortgage, and I've used that money to fund a lot of repairs to the house I bought.
I'll switch to a repayment at the end of my 5 year term, and then pay it off over 20 years, not that I will still be in this house in 20 years.

Is it not basically the same as renting as you'll never ever fully own the house?

Well its nothing like renting, because banks arent landlords, but my mum bought her house 25 years ago, if she had an interest only, it would be for about £30k, the house would sell for £120k next week.

The other big catagorys of people are landlords, and endowments.
Landlords write off interest as a business expense, so theres not a big push to pay off the capital.
During the 80's, someone came up with the mad idea of paying interest on the mortgage for 25 years, and instead of repaying the capital, invest in the stockmarket for 25 years.

GAH

Back in the day interest only mortgages ran along side endowment policies which were effectively a repayment vehichle to pay the capital off the mortgage.

In the boom years, interest only mortgages were handed out left right and centre with no need for a repayment vehichle, and the two options here were;

1. People needed to arrange their own repayment method, which a lot of people haven't and I seriously think a lot of people took these mortgages interest only as they were a cheaper alternative and they never understood them.

2. People were gambling on house prices rising, and after a few years having enough of a lump to put down on there next purhcase. Risky stratergy but sure it worked for some people.

People that are really stuck are people that took 100%+Mortgage on an interest only basis plunging into a deep barrell of Negative equity.

RedfordML

For short term mortgages, interest only is the way forward.

Lower monthly repayments, means you can save personally and pay upto 10% every yr penalty free.

I don't understand why anyone does a repayment mortgage unless they are looking a long mortgage, even then I would be inclinded to go interest only.

evansmummy

Personally we're going for an interest only short term this time.
This is due to me being at home with the children until my youngest starts full time school next September. Once they are both at school I will be going back to work and part of my salary will be to cover the mortgage when we go back to a repayment mortgage.
It's just a short term solution not a long term plan to use interest only.

princeofpounds

An interest-only mortgage is effectively renting the money to buy a property, instead of renting the property itself.

You have the advantage of title to the property, meaning you have no landlord and can live in it as you like, add value or whatever.

You also effectively freeze the price of the property. If there is lots of inflation (in property prices and/or wages) then this price slowly becomes cheaper over time. If not, you can be stuck in negative equity and end up paying more than you needed to in the end.

Finally, you also have flexibility to design your own repayment program. With a normal mortgage you are forced to pay your repayments into the mortgage, which returns you a fixed rate on the investment (i.e. by lowering your mortgage payment). With an interest only, you can keep repayment money outside of the mortgage and invest it in something else if you prefer.

IO mortgages are much abused, but they are not bad tools in themselves, it's just the way people use them (people like the 'cheapness' which is actually an artificial benefit for everything except lowering upfront demands on your cashflow).

Mr_Moo_2

If you want an Interest Only mortgage, get a shift on... some lenders are tightening affordability criteria, making more checks that a repayment vehicle is running alongside to repay the capital, and limiting LTV on interest only mortgage to sometimes as low as 50%