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Interest
only Mortgages
A
mortgage is effectively a personal loan
that is obtained from a bank or building
society used to pay for a property. The
lender is then repaid in monthly instalments
for a fixed period of time. As with personal
loans, mortgages are subject to interest
charges.
There
are essentially two different classifications
of mortgages: repayment only mortgages
and interest only mortgages. Here we aim
to identify the distinguishing characteristics
of each type of mortgage, and the merits
of each one.
A
repayment only mortgage requires monthly
repayments that consist of both interest
charges and actual capital repayments;
effectively the same as the repayment
process for a typical personal loan. An
advantage of this type of mortgage is
that lump sum payments or overpayments
can be made, which reduces the interest
and capital amounts repayable. Also, at
the end of the repayment term, the borrower
is safe in the knowledge that the mortgage
has been completely repaid. There is also
a disadvantages in that the majority of
repayments made early in the repayment
term consist of interest payments. For
a borrower who moves house frequently,
this can be a hindrance as little of the
actual mortgage gets repaid. Also, because
it is not necessary to take out life assurance
cover with this type of mortgage, the
property will have to be sold to repay
any debt that remains in the case of death
of the borrower.
An
interest only mortgage requires monthly
payments that consist solely of interest
payments. The capital repayments are paid
into an alternative repayment vehicle
such as a pension scheme, ISA or endowment
policy; it is this repayment vehicle that
provides the lender with the repaid capital
at the end of the term.
Each
type of repayment vehicle has its merits,
but it is important to choose what is
right for you. Buying a house is usually
the biggest investment an individual will
make in their lifetime, and mortgage repayments
are normally required for anything up
to 25 years after the mortgage has been
issued. For this reason, one should seek
professional financial advice if undecided
about which mortgage plan is the one to
go for.
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Interest
Only Mortgages
Interest Only Mortgages Online