Is an interest only mortgage suitable for you?
Tuesday 14 May, 2019
Vishal Gulrajani and Thomas Wheatley, Mortgage Brokers in Goff’s Oak & Cheshunt, Hertfordshire review interest only mortgages and consider why they are suitable for some clients.
We are nearly halfway through the year and still the uncertainty of Brexit hangs over our economy and the property market. However, for many the uncertainty is not such a bad thing as it has led to some banks lowering interest rates which could make it a good time to obtain mortgage finance and purchase a house.
As well as low interest rates we are also seeing a return of some interest only mortgages. According to Moneyfacts data the number of interest only mortgages has doubled in the last 6 years.
What is an interest only mortgage?
Vishal Gulrajani, Mortgage Broker in Goff’s Oak & Cheshunt, Hertfordshire, said:
The first thing to understand is what is an interest only mortgage? Unlike a capital repayment mortgage where your debt is cleared at the end of the mortgage term, an interest only mortgage will still have an outstanding balance at the end of the term and the original debt is re-payable. As a result taking out an interest only mortgage means you pay the bank’s charges for granting you this loan. Now many of you will be wondering how you pay back this massive debt at the end of the term, if all you are doing is serving the interest repayments. These are legitimate concerns and is why interest only mortgages now have more regulations and stipulations attached. For example there is advice available on who can take out an interest only mortgage and when interest only mortgages can be offered. The mortgage market is now advised and a regulated industry, so interest only mortgages are not offered to everyone. Only people who can afford to pay back their debts to avoid their homes being repossessed should consider these types of mortgage.’
Interest only mortgages can only be offered in certain circumstances
Vishal Gulrajani, Mortgage Broker in Goff’s Oak & Cheshunt, continued:
‘The greater flexibility in terms of products offered in the mortgage market can be seen as a good thing and interest only mortgages contribute to this. Interest only mortgages have always been popular in the commercial buy-to-let investment market. For commercial consumers repaying this mortgage debt is not usually a concern as selling their property is always an option and these mortgages are available until death. The concern is for residential mortgages as the consumer generally needs to have the mortgage debt paid off by the time they reach seventy or eighty years old. If they don’t pay the mortgage off then they would be forced to sell their home and find somewhere else to live. This is why new regulations are now in place to make sure mortgage advisers only recommend interest only mortgages for high net worth individuals, properties above a certain value or where a repayment strategy is in place. As a result it looks like the mortgage market has learnt from its previous mistakes. Mortgage repayment plans have to be evidenced to cover the interest only mortgage or the property has to be of significant value so that downsizing is a possible option in later years. ‘
Thomas Wheatley, Mortgage Broker in Tottenham, North London said:
‘Overall the re-introduction of the interest only mortgage gives the consumer more options and choices, especially for customers who need extra disposable income in the short-term. However it is important to understand that interest only mortgages represent a higher risk option for consumers and we would recommend anyone who is considering taking out an interest only mortgage gets mortgage advice first.
In summary get mortgage advice if you are considering an interest only mortgage
As Vishal has discussed interest only mortgages are not suitable for everyone, which is why at Thomas Oliver we always make sure our recommendations are personalised and unique to the client. We always consider a worst case scenarios when we offer mortgage advice to our clients to make sure that you and your family will not be left vulnerable or in financial distress. If you want to find out more about the mortgage and protection advice offered by Thomas Oliver we recommend that you call us on 01707 872000. We offer a free initial consultation when we can discuss your mortgage requirements and we can give you more information about the type of interest only mortgages available.’