Interest Only Mortgages
In the last few months, we've seen an increasing amount of interest only enquiries from existing property owners looking to reduce their monthly payments due to the increase in rates. Interest only mortgages can be an attractive option for mortgagers looking to lower their monthly payments and delay paying the capital off. However, they also come with some unique risks and considerations that borrowers should be aware of.
What is an interest only mortgage?
An interest only mortgage is a type of mortgage where the borrower only pays the interest on the loan each month, rather than paying down the original balance. This means that the borrower's monthly payments are lower than they would be with a traditional mortgage, but it also means that the borrower will still owe the original loan amount at the end of the mortgage term.
Who is eligible for an interest-only mortgage?
Interest only mortgages are typically available to borrowers with a higher income and a larger deposit or equity in their current property, as lenders may view these borrowers as less risky due to their financial stability. However, borrowers must still meet certain criteria and be able to demonstrate that they will be able to repay the loan at the end of the term, called the 'repayment vehicle' This could be the sale of the mortgaged property at the end of the mortgage term, a pension lump sum, sale of another property or a combination of these strategies.
What are the risks of an interest only mortgage?
The main risk associated with an interest only mortgage is that the borrower will be unable to repay the original loan amount at the end of the term if the repayment vehicle is not sufficient. If the borrower is unable to refinance or sell the property to repay the loan, they may face repossession.
Additionally, interest only mortgages can be more expensive in the long run, as the borrower is only paying the interest and not building equity in the property. This can result in a higher overall cost of borrowing.
At MRG Private Clients, we believe in providing our clients with personalised guidance and support when it comes to making important financial decisions. If you're considering an interest only mortgage or have questions about the options available to you, please get in touch.