What’s an interest only mortgage?

Posted on July 4th, 2016

Interest only mortgages were a hugely popular product, which allowed borrowers to pay the interest on their mortgage each month and not any of the actual debt.

Paying just the interest meant the borrower’s monthly repayments were significantly lower than they would be for a repayment mortgage. Unsurprisingly therefore, interest only mortgages were popular with borrowers struggling with affordability.

The reason for the past tense is that once the credit crunch hit most of these products disappeared from market as they were deemed too much of a risk. Indeed, there are quite a few borrowers with interest only mortgages today who are reaching the end of their mortgage term and facing a problem – they have no means of paying off their debt.

Interest only mortgages rose in popularity at a time when house prices were rising significantly. As such many homeowners thought they could simply pay the interest over a 25 or 30 year term of the mortgage and prices would have risen high enough to pay off the mortgage debt. Of course this was a huge gamble to take. Repayment vehicles such as Endowment policies, Isas etc… hoping for returns could not usually be relied upon to pay off the outstanding debt which meant that people were left with outstanding debt that they did not anticipate. Also house prices can be volatile and many borrowers are now stuck with a chunk of debt and no way of repaying it.
There are alternative – and much safer ways – of keeping your monthly repayments low. To begin with, put down as a big a deposit as possible. The bigger the deposit the lower your monthly repayments will be so it really is worth taking that extra time to save before rushing into buying.

And, wherever possible, make overpayments (if your mortgage lender allows this). If you get a big bonus at work or come into a bit of cash, paying it off your mortgage can reduce how much you owe and as a result how much you pay each month (depending on your agreement with your lender).

To find out more about how to make your mortgage repayments manageable call in to We Know Mortgages Ltd today.

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.