Interest Only Mortgages explained and available solutions
Interest Only Mortgages are one of two methods of mortgage payment, the other being on a Capital Repayment basis.
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Here we explain Interest Only Mortgages and how they work, and take a look at some of the potential pitfalls and dangers of interest only mortgages, and offer further information as to how we might be able to help you.
Table of Contents:
What are Interest Only Mortgages
So as we outlined in the introduction, an Interest Only Mortgage is one one of two methods of mortgage payment, the other one being a Capital Repayment Mortgage.
With an Interest Only Mortgage, the original amount borrowed will remain the same throughout the mortgage term. Monthly repayments made will cover the interest charges only, and so at the end of the mortgage period, the capital sum borrowed, still remains outstanding.
As the borrower doesn't repay any capital with their monthly instalment, usually an investment product will be arranged to run alongside the mortgage. The traditional investment vehicles to run alongside Interest Only mortgages have been endowment policies, pension plans, ISA's or some other long-term savings plan.
So it is this investment that is designed to repay the capital amount borrowed. These have become a lot less popular in recent times due to the drop in investment yields.
Can I borrow on an Interest Only basis without having a repayment vehicle?
It is possible to have an Interest Only mortgage without a repayment vehicle, although both Mortgage Advisors and lenders will usually want to understand why. To arrange the provision of substantial amounts of money on mortgage without investigating how it is likely to be repaid is likely to be considered as irresponsible lending, and the Regulator would undoubtedly take a dim view of such a practice.
However, if there is a valid reason to lend on an Interest Only basis, then this route can be perfectly sensible and appropriate. Such reasons may include:
- Investment arrangement in place:
The borrower may have an investment vehicle running alongside the Interest Only mortgage that is geared to repay the principal amount borrowed at the outset. The investment vehicle would usually be pension-linked, an Endowment policy, or savings vehicle such as an ISA, and the investment will be geared to produce an amount at least equivalent to, or greater than, the amount borrowed on mortgage. - Family support:
Mortgage payments need to be as low as possible whilst the borrowers child or children are at University, when they have graduated, the family home will be sold, and the parents will trade-down to a smaller property, and either purchase outright, or convert to a Capital Repayment basis at that juncture. - Large Cash Sum due in the future:
A large inheritance is expected in the future, and the borrowings will be repaid from that. - Sale of Property in the future:
The borrowers are likely to sell their property within the next 3 to 5 years, and will convert their borrowings to capital repayment at that time. - Professional Development:
The borrower(s) may be young professionals on a career ladder, such as nursing or accountancy, and need to keep their mortgage payments as low as possible until such times as they have qualified, at which time they are likely to receive substantial increases in pay.
The pitfalls of Interest Only Mortgages
It is very important to remember that only the Capital Repayment mortgage guarantees that the mortgage will be paid off at the end of the mortgage term.
The danger of arranging an Interest Only mortgage is that if no investment vehicle is put in place to repay the capital, then the mortgage will remain outstanding at the end of the term, and if the borrower cannot repay the loan by this time, their home will be at risk of repossession.
How Shire Direct may be able to help you!
Hopefully, we've managed to explain interest only mortgages and have answered any initial questions you may have regarding them. If you would like a qualified Mortgage Advisor to assess your options, we would be delighted to weigh-up the options for you, and recommend the most appropriate solution for you to meet your needs, circumstances and aspirations. enquire online anytime or why not call us free on 08000 282 281, our lines are open until 10pm everyday including weekends - we'd love to hear from you!
The overall cost for comparison is 9.8% APR.
The actual rate available will depend upon your circumstances. Ask for a personalised illustration. APR variable and based on a usual case. Most customers are likely to receive a lower rate or the same rate as our overall cost for comparison rate - learn more about APR.
There are no upfront broker fees.
However, a fee may be charged on successful completion. An indication is that on conforming cases (straightforward applications with no or minimal adverse credit) a fee may be charged of up to 1% of the amount advanced, typically £795 and will depend on your circumstances.
For non-conforming cases (where case research and processing may be more complex due to adverse credit or unusual circumstances), a fee may be charged of up to 3% of the amount advanced, typically £1,995.
THINK CAREFULLY BEFORE
SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED
IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Adding existing debt to your mortgage will increase the repayment term and overall cost.
Are you worried and becoming stressed because you are having problems getting a mortgage or remortgage? Worry and stress no more! Here at Shire Direct we provide tailor made mortgage solutions to suit you, and can usually help with all kinds of circumstances including...
Remember, we're here to help, and would love to hear from you!
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