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Interest-only mortgages
itchyfeet123
Posts: 481 Forumite
In case it matters, I'm not on the market for a mortgage, interest-only or otherwise. I'm just trying to ensure I correctly understand the concept and why people use them. Please correct anything I have wrong, and feel free to add any nuances I'm overlooking.
My understanding of the interest-only mortgage is that over the course of the loan all payments pay only the interest, and the principal is repaid as a lump sum at the end.
The upside is that the monthly payment is lower, freeing up money for investment elsewhere. If the property increases in value, there is potentially a greater net gain than under a standard mortgage as the same capital has produced both the increased value of the property and whatever returns the other investments get. It diversifies one's investments to be in both the property and wherever the money has been put.
The downside is that a lot more money is paid in interest compared to a normal mortgage, The risk of getting into negative equity is higher as the principal hasn't been reducing over the course of the loan. Losses could be amplified if something like a financial crisis affects both property values and, say, the stockmarket.
What have I missed?
My understanding of the interest-only mortgage is that over the course of the loan all payments pay only the interest, and the principal is repaid as a lump sum at the end.
The upside is that the monthly payment is lower, freeing up money for investment elsewhere. If the property increases in value, there is potentially a greater net gain than under a standard mortgage as the same capital has produced both the increased value of the property and whatever returns the other investments get. It diversifies one's investments to be in both the property and wherever the money has been put.
The downside is that a lot more money is paid in interest compared to a normal mortgage, The risk of getting into negative equity is higher as the principal hasn't been reducing over the course of the loan. Losses could be amplified if something like a financial crisis affects both property values and, say, the stockmarket.
What have I missed?
0
Comments
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Must admit I'm not sure how it works these days.
In the past you used to have to have an endowment policy to cover the mortgage and it paid out at the end of the mortgage or on death. I used to deal with these in the 60s and early 70s. In those days the policies plus profits were worth far more than the insurance amount at the end of term. Obviously when the mortgages were first taken out ie 40s and 50s properties didn't cost as much but I had to do the refunds that were owing to the customer after redeeming their mortgages. The refund was often as much as the original mortgage.
I can't remember the difference in the interest on each but it wasn't that much and I think at one time it was the same as repayment mortgages. As you can see it was a long time ago lol.0 -
They virtually don't exist.0
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Popular, less so than before, with landlords: Why? Landlords can claim interest on mortgage against tax....0
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There are very few Interest Only mortgages available for borrowers who are buying a property to live in !
Maybe if you are putting down a 40/50% deposit and earn a High Income you will find a lender.
Most lenders now want a repayment mortgage.
If you are a Professional Landlord and have a Large Deposit say 25/30% and money for the fees you can get a Interest Only mortgage to run your Business0
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