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.

Leave a Reply