What is an Interest Only Mortgage?

The CML state that nearly 6 Million people have mortgages that are interest only, meaning that monthly payments are applied only to the interest accrued on the debt and not the actual debt itself.

In addition, the CML has found that most first time buyers are seeking interest only mortgages. The number that apply for interest only loans increases each year. Why such a boom in this type of loan?

Well research has found that by allowing first time homebuyers to pay interest only, is the only way many of them can afford to buy a home. An example of how an interest only mortgage works is say a homebuyer wants to borrow £100,000 for three years at a fixed rate of 4.99%. The estimated payment for this person would be about £600 to repay the loan. However, if you make this interest only, their monthly payment would decrease to only around £400. The general problem with this type of mortgage is that the borrowing homeowner would need to have some way of being able to pay on the capital of the loan to avoid being left with the same debt.

Years ago, a mortgage lender would require that anyone applying for a loan be able to prove that they would be able to pay their loan. Today, it is simply the matter of reminding the homeowner that they will need to pay off the capital.

It is extremely important that you thoroughly consider your udget and put a great deal of thought in how you can pay off the capital of the loan. Many people rely on house prices to rise to help them, but keep a close eye on the market.

If you do have an interest only loan there are a few things you may be able to do. For example, you could have part of your mortgage switched into a repayment mortgage at some later stage, or maybe consider some tax free savings schemes like an ISA and start saving every month.

For more information on speak a financial advisors by contacting

www.you-can-mortgage.co.uk

Author: Reef Financial Services

First Time buyers use Interest only mortgages to get foot on property ladder

Published on 5/4/2006.

All articles.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

Reef Mortgage Services Ltd is authorised and regulated by the Financial Services Authority.