What Is An Interest Only Mortgage

What Is An Interest Only Mortgage

What is​ an​ Interest Only Mortgage
The CML (Council of​ Mortgage Lenders) show that nearly 6 Million people have received mortgages that are interest only .​
Interest only mortgages means that your monthly payments are applied only to​ the​ interest accrued on​ the​ debt and not the​ actual debt itself .​
Additionally,​ the​ CML has found that many first time home purchasers are seeking interest only mortgages .​
The number of​ first time buyers that apply for interest only loans increases each year .​
Why such a​ boom in​ this type of​ loan? Well research has found that by allowing first time homebuyers to​ pay interest only,​ is​ the​ only way many of​ them can afford to​ buy a​ home.
An example of​ how an​ interest only mortgage works is​ say a​ homebuyer wants to​ borrow £100,​000 for three years at​ a​ fixed rate of​ 4.99% .​
The estimated payment for this person would be about £600 to​ repay the​ loan .​
However,​ if​ you​ make this interest only,​ their monthly payment would decrease to​ only around £400 .​
The general problem with this type of​ mortgage is​ that the​ borrowing homeowner would need to​ have some way of​ being able to​ pay on​ the​ capital of​ the​ loan .​
Otherwise,​ at​ the​ end of​ the​ loan term they will still be left with the​ same debt .​
Years ago,​ a​ mortgage lender would require that anyone applying for a​ loan be able to​ prove that they would be able to​ pay their loan .​
Today,​ it​ is​ simply the​ matter of​ reminding the​ homeowner that they will need to​ pay off the​ capital .​
Typically,​ it​ is​ usually required that those interested in​ a​ interest only loan have some sort of​ investment,​ for example and ISA (independent savings account) that will go towards the​ capital when the​ mortgage terms end.
It is​ extremely important that you​ thoroughly consider all your means and put a​ great deal of​ thought in​ how you​ can pay off the​ capital of​ the​ loan .​
Many people rely on​ house prices to​ rise to​ help them,​ with lower wages and falling prices this will not provide a​ secure environment .​
This in​ the​ end could mean trouble for the​ homebuyer.
So,​ by now you​ are probably wondering what you​ can do to​ pay this loan off .​
You could consider a​ mortgage of​ repayment,​ a​ portion of​ every monthly payment you​ make goes towards the​ actual debt .​
This is​ more expensive than the​ interest only loans; however,​ it​ does help reduce the​ debt by actually applying payments towards it .​
If you​ do have an​ interest only loan there are a​ few things you​ may be able to​ do .​
For example,​ you​ could have part of​ your mortgage switched into a​ repayment mortgage or​ open an​ ISA and start saving month every month .​
This is​ tax-free and by saving,​ you​ will bid up funds to​ put towards the​ capital.

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