Summary:

We are seeing a return to the interest only mortgage. Unless youre sure that youve taken the right steps to cover the eventual capital payment, the future could be a little uncertain.

  (remortgages)

 

Is “interest only” worth the risk?

 

Author: Dot Piper (pet insurance)

 

Interest only mortgages were extremely popular in the 1970s and 1980s, when they were normally linked with an endowment policy. Sadly, many of these endowment policies under-performed and left many borrowers with a shortfall when it came to paying off the back the capital. In spite of their promises of there being sufficient funds to repay your mortgage at the end of 20 years or so, the results left many people disillusioned and therefore they switched to repayment mortgages, which have been the normal method of financing home-buying since then. (cheap life insurance)

Times are changing, and currently these mortgage quotations are experiencing an upsurge in popularity. In the first three months of 2002, 9% of new mortgages were interest only. By the last three months of 2005 this figure had increased to 23%. First time buyers are also attracted to this type of mortgage and by the end of 2005 the numbers of first time buyers choosing it were up to 15%, from just 6% at the beginning of 2002.

As the name implies, just the interest on loans is paid, leaving the capital debt intact. All payments made over the term of the mortgage are credited to interest and repayment of the capital amount is made at the end of the mortgage term. Because of this, monthly payments are much lower than with a repayment mortgage. This is fine and makes buying your home much more affordable without the need to sacrifice your lifestyle. The problems may come when the time comes to pay the original loan.

The FSA (Financial Services Authority) are concerned about the possibility of borrowers taking out an interest only mortgage without making provision to pay off the capital and mortgage lenders are now asking for proof that you have arranged a savings fund to cover the final capital payment. Pension plans and ISAs are the usual ways to do this, but after the disaster of the endowment policy saga, who can guarantee that there wont still be a shortfall? A danger is that the borrower may go ahead with full intentions of keeping up the payments on these plans, only to find that due to changing circumstances, they are unable to fulfil this, and they may end up having to cancel the plan. There is nothing to stop borrowers from cancelling as soon as the mortgage has been agreed. (best mortgages)