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Mortgages

Is an Interest Only Mortgage a Good Idea?

Interest only mortgages allow you to just pay back the interest each month and you do not have to pay back the money owed until the end of the term. These were popular but they are now becoming rare as people are not repaying them at the end of term. However, assuming you can find one, is it a good idea for you to take one out?

When you take out an interest only mortgage, the lender will assume that you have a way to repay the balance when the term is up. This used to be done using an endowment, which was a special type of investment that would be made monthly and should increase in value enough by the end of the term so that you have enough money to pay off the debt. However, there was a period when the stock market did not perform as well as expected and endowment holders were told to invest more money or else they would not have enough to pay back the loan. This reduced people’s faith in endowments and some took to investing in different ways. It also made lenders more wary as they wanted to make sure that their customers were capable of repaying their debt at the end of the term and so some stopped offering this type of mortgage. There were also borrowers that never bothered to invest at all and decided that they would just sell the home near the end of the term, repay the mortgage and use the left over money for a deposit for a new one. However, there was a long period where house prices did not go up and so when people sold there was not enough to pay of the full mortgage because of the fees.

So if you are considering an interest only mortgage then you will need to make sure that you have a plan in place to invest the necessary amount of money in order to pay off the loan at the end of the term. You do not have to get an endowment, of course, but there are other options which will allow money to build up so that you will have enough. It can be advisable to speak to a financial advisor so that they can set you up with something that will suit your budget, the term of the loan and should offer a good enough return so that you have a lump sum at the end of the term that will repay what you have borrowed.

You will need to have good self-discipline though. The investment that you make may not be tied up and so you could withdraw from it. You may also be able to stop paying into it or pay less into it. This means that you could end up being tempted to take some money out or pay less in if you are short of money. This could be a disaster when it is time to repay the loan as you may just not have enough money there. You may be confident that you will not do this anyway, but only you know how you are likely to act in this situation.

Some people also prefer to see their debt going down. If you have a repayment mortgage you will be repaying some of the debt every month and this means that you will be whittling it down. It may be slow but it can be satisfying seeing that debt going down and down.

So whether this type of mortgage is right for you is a very personal decision. It is wise to think about your personality and whether you will have the discipline to do the required investment and not be tempted to withdraw money. You will also know whether you will feel happier knowing that the debt is being repaid rather than relying on having the money available when you need it. It can certainly be well worth discussing it with a few people and running through the figures as well. Talk to a financial advisor if you can afford one as they will explain everything clearly and let you know what deals are currently available that you could apply for.

Debt

Is it Best to Stay Debt Free for the rest of my Life?

There are some people that really do not like being in debt. There are others that do not mind too much but think that being in debt should be avoided as much as possible. However, should we go so far as to pledge to stay debt free for the rest of our lives?

It is worth noting that there are different types of debt. Often we think of the word debt to mean someone with many unpaid credit cards, overdrafts and loans struggling to make the minimum loan repayments. However, there are debts which are often classed as good debts.

Good debts can include many different things and people are not always in agreement as to what a good debt is. However, it is usually agreed that mortgages and student loans are forms of good debt. This is because by having them you can improve your financial situation. Take a mortgage, for example. You will borrow money to buy a house. In most cases the house will increase in value so that even though you have paid to borrow money you should still gain from it. The increase in value of the house should be more than the cost of the loan, particularly if you keep the house once the mortgage is paid off. You will also save money in not having to pay rent. There are also non-financial gains of security of knowing you have a permanent residence, knowing you have something to pass on to your children and having a place of your own that you can put your own stamp on.

However, bad debts are very different. These are debts where you use the money to buy things which will not benefit you greatly. Of course, this can be a very subjective decision as you may feel that certain things will make a big difference to you and other people may not agree. You will need to work out whether you think that the pros of getting the loan outweigh the cons. Obviously the loan will cost money and commit you to repayments over a certain time period but you may think that it is worth it if you get something really good out of it.

Some people may decide that they never want to be in debt again if they have had problems in the past. Perhaps they have built up so much debt they struggled to pay it back or they are worried that they will get into big trouble with debts and it is understandable that they may be worried. It could also be a concern that interest rates have stayed low for so long that getting a loan now could mean that it will become very expensive as interest rates can really only go up.

Only you can really know whether you are safe to get a loan. You know whether you can trust yourself to pay it back and whether you have the funds to be able to do so. You may have some idea of what your future might bring and how secure your job is, so you can work out whether a loan is a big risk or not. Your age could be a factor too as if you are coming up to retirement it may not be a good idea and perhaps if you are planning a family your income may go down and your expenses up so it could make finances very difficult to manage.

Staying debt free for your whole life could be a sensible policy if you fear that one loan could lead to another which could lead to a mountain of debt. Only you know whether you are likely to be like this or whether you will have the self-discipline to keep control of things. You will also need to think about your personal situation and whether you think that you will be able to manage the repayments, both in the long term and the short term. However, you could limit your financial future by deciding that you will never get into debt. You may have to avoid university because you will not get a student loan, never own your own home or not be able to start a business because you will not get a loan. So you need to make sure that your decision makes sense.