Interest Only Mortgages Explained

Those who are disciplined may find that the traditional mortgage option is one that can really benefit them. This sort of mortgage involves them paying the interest on the loan as well as a small amount of the principal.

This is among the most common forms of loan and once the borrower manages the minimum payments for the length of the loan it will be paid off but the end of the term.

However, the interest only home loan is now one that has increased in popularity, thanks in part to the rise in interest rates and also the increase in the price of houses. The interest only home loan was initially designed for those purchasing an investment, though has a range of the same features that the traditional mortgage has. However, the repayments are a lot lower.

These loans allow borrowers to lower their monthly repayments and afford to take out a bigger loan as they have less to pay back. This is something that has become increasingly attractive and will continue to do so should the interest rate rise from its current low point. Currently around 2 per cent of loans in mortgage form are in the interest only loan bracket.

Ideal for Some

For the short term many people find these loans to be ideal and to work well for them. They are ideal for the disciplined as they mean you can stretch finances without breaking them and they allow larger loans to be more viable.

One way that a lot of people manage to work these loans to their advantage is to invest the money saved into a higher rate account or investment and so make their money work. These loans are also often used by those renovating an existing property or those building.

It is ill advised however to use the money saved on one of these loans for everyday costs and basic essentials, as when the principal has to be paid you will end up in trouble.

Long Term

These are not a long term option and most people take out the interest only part of the loan for around five years or so. This is the time used to sell or refinance the property and the interest covers the period. This can be more useful for larger loan amounts than smaller ones and allow for substantial savings if worked out properly.

You will have to pay the principal eventually and once the term of these loans is over you still have the high interest charges and principal to repay. This means they are not ideal for everyone.

These loans are risky if property prices should fall and you have to sell a house quick for less than the loan and end up in negative equity. However, for the right person and the right situation they are ideal and work very well.

Cormac Reynolds works for UK company YouSellQuick who provide quick home sales.