Interest-only mortgages have elicited varying opinions over the years. Yet today, an interest-only mortgage is worthy of interest to many people who want to buy a home.
What are interest-only mortgages?
Interest-only mortgages are a type of home loan, where your monthly payments to the lender only cover interest instalments. They differ from repayment mortgages in that you only pay the capital off at the end of the mortgage term. At that point, you need to pay it back in full.
With repayment mortgages, your monthly payments go towards repaying part of the capital off, as well as some interest. With these types of mortgages, at the end of the term – most often after 25-35 years – you will be guaranteed to have paid off the whole of your loan, providing you have met all your monthly payments.
Benefits of interest-only mortgages
For the right borrower, there are clearly benefits to be had. They include:
- Lower monthly payments initially - one of the biggest appeals of an interest-only mortgage is the smaller monthly payments.
- Better cash flow - smaller mortgage payments can improve cash flow – at least in the initial years. With the cost of living as it stands at the time of writing, this can help with other costs such as high energy prices, and so on.
- Potential investment opportunities - a more manageable cashflow may present the opportunity to invest. Whether that’s in the stock market or building your property portfolio, this could help with paying off the capital.
Risks of interest-only mortgages
There are some risks that come with an interest-only mortgage; including:
- They can be particularly risky after your interest-only period ends, as your payments will likely rise.
- Payments could also rise as most come with a variable interest rate; it’s important to be aware that with interest-only mortgages, that rate may increase.
- How soon you will be able to build equity needs to be a factor for consideration, as you won’t be paying off the capital in the initial years.
- Market conditions may mean you could, in fact, lose equity. Should the property market decline or if the value of your property decreases for any other reason, interest-only mortgages with the goal of selling before the end of the interest-only period, can be precarious.
