What Is An Interest Only Mortgage?
To put it as simply as possible, an interest only mortgage refers to an agreement wherein only the interest is paid, either for part of the repayment period of the entire period of the mortgage itself. While many loans are available like this, mortgages are a particularly common example, as the value of the house often serves as collateral.
This differs from more traditional loans, where you pay part of the loan’s value (otherwise known as the principle) alongside the interest. In these mortgages, you typically pay a higher rate each month but, since you are making payments on the principle value, the overall period will significantly differ.
What Happens When The Interest Only Period Ends?
At the end of the mortgage, you will typically have to repay the principle in full, negotiate a further interest only mortgage, switch to a combined principle and interest loan, or use the house as collateral.
When it comes to negotiating, you often have many options available. After all, most mortgage providers will often seek to help find an agreeable solution for both sides. Agreeing to make the interest only payment longer, for example, can help through periods where your income has not been as expected, or you have faced surprise costs elsewhere. While this only delays any further payments (as the principle has yet to be repaid) it does make the payments in the foreseeable future more manageable.
What Should You Consider When Thinking About Such A Mortgage?
The main benefit of an interest only mortgage is that it makes the initial payments more manageable, as you are not paying for the principle as well. However, the trade off to this is that the principle will still still need to be paid off at a later date.
While you could greatly extend the duration of an interest only option, this could result in you paying much more in the long run. Because of this, it is always wise to consider your financial situation both now and in the immediate future. If your income, for example, is low for the immediate future due to various reasons, but it is due to go back up later on, interest only mortgages can be one way to negotiate these more difficult periods – when your income is more stable, you can then negotiate or otherwise switch your payments to a more traditional option.
Who Should You Speak To?
Due to their unique nature, it is important to get advice from an impartial expert when considering such a financial option. Every individual’s position is unique, due to various factors, such as their income, the value of their property and the various mortgage options these can result in. As such, it is certainly worth spending the time to consult with advisors that can offer insight into which options are more suited to your specific needs.
Mortgage Force West Midlands offer independent advice and mortgages. We can help explain the various options available, including interest only mortgages, breaking down their payment plans to help you make the most fully informed decision.