Interest only Mortgage is the type of mortgage repayments where you do not pay for principle for some specific time. The borrower is required to pay only interest on the mortgage and principal can be repaid in a lump sum at a specified time as per your contract.
This type of mortgage suits for the Buy-To-Let (BTL) buyers very well: It allows them to rent a property without the inconvenience of ever fully owning it.
The Interest only mortgage is secured by a real estate that contains an option to pay the only interest which will reduce your mortgage payments drastically. But it ends up with a huge lump sum principal payments.
Advantages of Interest-only mortgage
Interest-only mortgage minimizes the monthly instalment amount by excluding the principal portion from a payment.
Buyers can have a chance to increase cash flow that supports for managing monthly expenses.
For the first-timers, The interest-only mortgage will allow them to defer large payments into future years when they expect to have a higher income.
If a borrower qualifies for this type of mortgage there are multiple ways that help him. If the Most interest-only mortgages require only the interest payments for a specified time period, let it be 5 years. Up to this time, the borrower will pay only interests and when the time completes his loan will be converted to a standard schedule where the borrower has to pay the interest plus the portion of the principal.
Some special provisions also allow the borrower to continue to pay interest payments in some circumstances.
Example: A borrower may able to pay a portion of the interest due to some damage occurs in the home where he needs to pay for maintenance.
There is also a provision where a borrower can make interest payments throughout the period of the loan. where he supposed to pay the principal amount in a one-time payment.
Disadvantages of Interest Only Loans
A rise in mortgage rates will increase your risk
People tend to pay extra money instead of investing it.
If your financial plan not set as you desire you may not afford principal payments when the time arrives and many are not disciplined enough to pay extra toward the principal.
The home may not appreciate as fast as the borrower would like.
Am I a Good Candidate for an Interest Only Loan?
From the above drawbacks you may alarm with the risk involved in it, So before stepping into it make sure that you are in this right option for your financial needs.
Check your current income is rather modest and is certain that income will increase in the future.
On opting interest-only mortgage makes sure that your other earnings used to toward other investments or principal payments.
If your income is irregular discuss the same with the bank that you have a flexibility of making interest-only minimum payments during times in which income is low, and makes larger payments during periods in which income is higher.
As per your savings commitment, only the mortgage lender will get some idea as to how you’re going to pay off that lump sum.
Paying off Mortgage loan
Once you acquire the interest-only mortgage you are supposed to pay the principal amount at some point. For paying the loan amount the borrowers have few options:
Some borrowers may choose to refinance their loan after the interest-only term has expired which can provide for new terms and potentially lower interest payments with a principal.
Some other borrower may choose to sell the home to pay off the loan.
Many borrowers will choose to individually save the principal on the loan in order to make a one-time lump sum payment when the loan is due.