Many people have over the years succumbed to the attractions of an interest only mortgage.
This, they reason, will either allow them to keep their payments down, let them invest the money saved into an ISA or pension maybe and get an overall better return or perhaps allow them to over pay when they can if they have an erratic income or they expect their income to go up in future years.
[adsenseyu1]Some are also swayed by the argument that over a 25 year period or more the mortgage amount owing will be eroded by inflation and dwarfed by rising property values. In that way finding the outstanding capital sum will be easier then. Or maybe they figure they can sell and downsize to be mortgage free.
But at the end of the day there are risks with this type of mortgage. Especially if there are protracted periods of stagnant house prices and almost nil returns on investments.
There are, says thisismoney.co.uk, nearly four million interest only mortgages in Britain. These people are not paying back any of the actual money they borrowed and if left to the end of the mortgage term (usually 25 years) then they would either have to find the capital or more probably sell the house. The article has salutary case studies for us all.
As a picture speaks a thousand words just look at this graphic to see how a capital and interest (repayment) mortgage diminishes and the interest only (in red!) just stays the same over the years.
There are dangers with an interest only mortgage for the average borrower, that’s why some companies consider them as the ‘adventurous’ mortgage. It is also why many lenders will not routinely let people have them – backed up by an ever watchful FSA who would question their over-use.
There are many mortgage holders who are well into the term of their mortgage and would find it difficult to put anything in place to repay it properly. Their investments are failing (including pensions) and house prices are just not going up as predicted.
Instead of burying heads in the sand and hoping this will go away those on interest only mortgages may well be better off if they just overpaid the mortgage a little as often as they can. This will bite into the capital owed and turn the mortgage into a partial repayment type. But you must have a chat with your bank or mortgage broker first! You wouldn’t want to end up paying charges for it would you?