Interest-only loans are where borrowers only play the interest on their loan, with the length of the loan being a set term. Once this set term is over, the borrower will be able to enter into an interest-only mortgage, where depending on the lender, the borrow can convent their mortgage loan into principle payments or interest payments. In the USA, interest only mortgages are usually approved at five or ten year fixed terms, the remaining mortgage balance is amortized.
This allows for the early payments on the interest-only loan to be significantly lower than the interest only mortgage payments, and these types of mortgages have become increasingly popular. Not only do they allow the borrower with more freedom and flexibility when it comes to repaying the principle, but it is also an easier step up onto the property ladder than applying for a conventional mortgage.
In the eyes of the lender, interest only mortgages are always high risk, and that’s why they insure this risk in the form of higher interest rates. Furthermore, as interest only mortgages require very little deposit, or in some cases no deposit at all, experts believe that the lack of equity generated by the loan is not worth the risk to the borrower.
UK Interest Only Mortgages
Recently, UK mortgage regulators have started to clamp down on interest only mortgage lenders, initiating a debt about the actual benefits of these types of loans. The Financial Services Authority (FSA), released a report stating that out of the 4 million interest only mortgages in the country, three out of four borrowers didn’t have a repayment plan as part of their agreement. According to the FSA, this can be extremely detrimental to future finances, as well as home equity.
It was also reported that the FSA also moved to ban interest only mortgages, however after the fierce criticism from major high street lenders, they withdrew this idea. According to the banks, they didn’t want the public to believe that they are responsible for the ‘credit bubble’, or the over-exposed nature of current borrowing. Indeed, interest only loans are cheaper than standard loans, however they also come with increased financial risk too.
These mortgages held their own in the stable financial period before the recession, however as house prices are falling, living costs are increasing and wages are not going up, many home owners are relying on credit to meet their needs. If you’re looking to compare the latest mortgages, make sure you visit soswitch.com.
Limbo
Because of the worsening conditions of the housing market, many borrows who have taken out an interest only mortgage feel that they waiting in financial limbo with their interest only mortgage. Homes are worth less than what they were bought for, meaning borrowers are unable to move. Additionally, due to stricter lending regulations by the banks, borrowers can’t change their mortgage, or switch to a better deal.
Thankfully, a small number of lenders are willing to lend extra cash to borrowers looking to move house, with the intention that they pay back the loan from the sale. Worryingly, relying on an increase in house prices is very speculative, and there’s no guarantee that this gamble will pay off anyway.
Views: 134
I must admit that I do not know much about finances but this interest only mortgage seems a little more complicated than a regular 30 year mortgage.
I don’t feel that this would be the way to go for buying a house. In Canada they did away with the no money down mortgage a few years ago.
So hard on first-time homebuyers, and even existing home owners. Alot needs to change. Such a shame. 🙁
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I know this sounds very complicated and new buyers don’t have a chance.
I would go for another type of loan.
It seem complicated loan. I am sure there is another simpler loan outside there.
There are always pros and cons of each type of mortgage;thanks for post.
Of all the things I have accomplished in my life, overcoming bankruptcy and then paying off my mortgage is one of the most satisfying. I do feel for the folks who are struggling with even just the mortgage rates!
Mortgages have never meant anything to me. I’m a renter from a long line of renters, and have never even lived in a rented house, only apartments. This seems to be a complicated business! I would be scared to bind myself to a 30-year committment like that. Hey, I couldn’t even stay married that long!