According to recent statistics from the Financial Services Authority, four out ten United Kingdom households have obtained finance for their property through an interest only mortgage. This type of mortgage deal was very popular in years gone by when the housing market was booming and property prices were high and the Bank of England base rate was low.
Why are interest only mortgages beneficial?
There are a number of reasons why many people prefer an interest only mortgage. The main reason is that the monthly payments are less than on a standard repayment mortgage. This is because there is no element of the capital being repaid by the monthly payment. The payment is simply to cover the interest which is accruing on the loan. This can be especially important for some home owners which need to maximise the amount of disposable income in their household.
Interest only mortgages are also popular with buy to let home owners. Many people have sought to take advantage of the low Bank of England base rate and purchase a property to let out on a shorthold tenancy. The property is usually purchased as a long term investment which means that the rental money earned can be used to make the interest payments, with the capital being repaid at a later date when the property is sold for a profit.
The disadvantages of interest only mortgages
The main disadvantage to interest only mortgages is that there is no capital being repaid by the mortgage payments. This will mean that the home owner will need some other form of repayment vehicle to cover the capital repayment at the end of the mortgage term. In the past, many mortgage providers were very flexible about repayment vehicles. However, since the housing crisis, many lenders are taking a much firmer and responsible approach to ensure that home owners are not left with a large debt that they cannot pay.
Many lenders now have strict qualification criteria and this includes having a valid repayment vehicle in place. A great number of lenders will no longer accept stocks and share ISA investment or the possibility of an inheritance or employment bonus, since these are not certain to be sufficient to cover the capital of the loan. Furthermore, many lenders have now reduced the maximum loan to value ratios for interest only loans, which can make it difficult for certain home buyers to qualify, especially first time buyers.
Choosing an interest only mortgage deal
In order to choose a good interest only mortgage deal, you will first need to determine if you meet the qualification criteria. Some lenders now have very strict criteria including having a certain amount of savings or a high amount of equity in the home. However, if you are over fifty five, there is the opportunity for an equity release scheme such as an interest only lifetime mortgage. This type of scheme allows for home owners to borrow against the value of their home and make interest payments each month. However, many of these schemes have an open ended term, which has been based on the potential lifespan of the applicant. The equity release scheme balance is only repaid when the property is sold after the death of the home owner or when they have ceased using the property as their main residence. Many of these schemes offer a very attractive interest rate which is set according to the Bank of England base rate on a fixed or tracker interest rate. A number of schemes also have minimal early repayment charges, should your circumstances change, or have the flexibility to allow you to port the mortgage to another property should you decide to move home.
If you are interested in obtaining an interest only mortgage and you are over the age of fifty five, equity release may represent the best possible deal for you. There are a number of lifetime mortgage calculators available on the internet, which can illustrate the interest rates and monthly payments which would be required. However, it is a good idea to seek professional assistance from an equity release adviser. They will be able to go through all the possible options and help you determine if an interest only lifetime mortgage is the best solution for your requirements. While these types of equity release schemes may not offer rates as low as the Bank of England base rate, they can provide attractive deals. However, it is worth taking the time to assess the pros and cons of the specific product to ensure it is the best deal for you.