There are different types of mortgage loans available. A form of mortgage loan arrangement called an interest only mortgage affords the borrower low monthly payments that go towards paying off the interest only. The interest payments will run for a set amount of time, and when the term is due, the borrower owes the lender for the total amount of the principal. So what are the benefits of an interest only mortgage?
To begin with, you might ask yourself who would want to take out an interest only loan? First of all, an interest only mortgage is a cheaper way to acquire your own home compared with a repayment mortgage.
For people who want to enter on to the property ladder but cannot afford a repayment mortgage, an interest only mortgage becomes the next best thing. Since the entire principal becomes due at the end of the term, there are several options for paying off the principal:
- Use a form of repayment vehicles such as a pension, investment fund, endowment fund, or a savings plan.
- A lump-sum payment from an inheritance.
- Lower monthly payments affordable to middle and low-income families.
- It offers you better flexibility to manage your finances. You can plan for how you want to pay off the balance and use any leftover for other expenses.
- If you are waiting to use an investment fund to pay off the mortgage balance, you may have a lot more left if the investment performs well.
To further illustrate the monthly cost of an interest only loan, a mortgage of £160,000 with a 4% interest rate will only cost a monthly payment of £553.92.
What are the benefits of an interest only mortgage?
An interest only mortgage has the following benefits:
- An interest only mortgage helps first-time buyers buy a home at a more affordable monthly payment. If you want to stop renting and start owning a property, an interest only mortgage could be your way into the market.
- If you apply for an interest only mortgage, you still have the option to switch from an interest only mortgage to a repayment mortgage and vice versa. Although changing from one loan type to another will involve some adjustments especially with fees and monthly payments.
Is an interest only mortgage the right choice for you?
Every type of mortgage has advantages but also risks. One type of mortgage may suit a borrower more than another type of mortgage. Before considering an interest only mortgage, you need to make sure that you are aware of all the conditions and the risks involved.
You must have a reliable source of funds for paying off the loan at the end of the interest only term or at least have a good plan on how you can afford the repayment once it becomes due. If you want to work out the numbers and learn if you can afford an interest only mortgage, you can always speak to a financial advisor first before applying for an interest only mortgage.
You can also use online resources for comparing interest only mortgage offers from different lenders. There are many comparison sites with helpful information for first-time buyers or those who are looking for other options.