What are Interest only Mortgages?
The interest paid by the borrower on an interest-only mortgage is done on a monthly basis and the term is usually fixed in such loans. In most cases, the term ranges between five and seven years. At the end of the term, most customers tend to refinance their homes, pay a lump sum, or start to make repayments towards the principal. However, the amount of money you pay during this period increases to a significant extent. Should the customer choose to utilise the interest-only option every month when the interest-only period is in progress, payments made will not include any amounts toward the principal. Unless the customer pays an additional fee, the balance of the loan will remain the same.
Customers who are interested in interest-only mortgages usually avail them only if they are certain that they will sell the home in the near future, or if they want to make lower initial payments and are sure that they can keep up with repayments if the amount rise over a period of time. Even customers who are sure that they can receive a considerably higher return rate if the money is invested elsewhere.
Benefits of Interest Only Loans
- During the term of the loan, monthly payments are significantly low
- Once a loan is taken, the customer has the option of buying a bigger property at a later date as it will be easier to be eligible for a bigger loan
- Additional money can be placed into investment to increase net worth
- When the interest-only period is in progress, all monthly payments are counted as tax-deductible.
Risks involved with Interest-Only Loans
- Increasing rates of interest on mortgage payments in case the customer has taken out an adjustable-rate mortgage.
- Most customers end up spending additional money rather than investing it.
- Most customers find it hard to afford principal payments within the specified time frame, and the lack of discipline usually affects their credit score.
- The growth of income might not materialise as swiftly as planned.
- The value of the property many not increase as quickly as the customer may like.
Frequently Asked Questions - FAQs
- When do monthly payments increase?
- Will there be penalties in case of defaults?
If a customer has an adjustable-rate mortgage payment option and the interest due is not included in the minimum payments, the unpaid interest is added to the principal. As a result, the customer may be in a much larger debt that the amount that was initially borrowed. Monthly payments also increase when the balance of the loan increases to the contract’s limit.
Yes, some interest-only loans have penalties when prepayments are made by the customer. Should the customer decide to refinance the loan when the repayment penalty period is in progress, the customer will owe the lender some extra fees. Make sure you check with the lender for a proper explanation of the penalties that may apply.