Repayment Options
Interest
Only mortgages |
Advantages | Disadvantages
Advantages Of Interest Only Mortgages
One of the principle advantages comes from the fact that
if your investment or savings vehicle performs better than
expected, then you will be left with a cash surplus at the
end of the term. This can be returned as a lump sum, invested
elsewhere, or stored away for some other purpose.
Interest-only mortgages allow you to amalgamate several
financial needs into a single payment. For one monthly sum
of money, you can cover your mortgage, life assurance, investment
and protection needs. Once the initial product and provider
selections are over with, some people find this all in one
combination a lot easier than dealing with each product
separately.
Whereas with a repayment mortgage you would have to specifically
look for a mortgage that is portable if you want to take
it with you when you move house, the repayment vehicle that
accompanies an interest-only mortgage is always unaffected
when you move home. You may need to increase the payments
into the fund if you are borrowing more money to buy a more
expensive house, but the term (if there is one) should be
unaffected and there will be no new charges to face for
setting up a new fund. This means that if you move regularly,
an interest-only mortgage could see you paying off your
loan earlier than a repayment mortgage.
Some buy to let investors find interest-only mortgages
attractive, due to the fact that they receive tax relief
on the mortgage interest payable on any investment properties
they own. A repayment mortgage will therefore afford a landlord
a diminishing amount of tax relief as time goes by and the
debt is reduced, whereas an interest-only mortgage maximises
the tax relief over the life of the mortgage.
Leaving the savings or investment product aside, the monthly
payments to the lender on an interest-only mortgage are
lower than with a repayment mortgage. This is particularly
appealing to those who do not need to repay the capital
as they go along. You may be sure you will be able to repay
the loan at the end of the term, for instance with a trust
fund or inheritance and therefore not want the ongoing expense
of reducing the mortgage debt.
In recent years, the majority of borrowers have been scared
off by the poor performance of the stock market and the
poor returns it has generated for their endowment, pension
or ISA fund, with the result that most people now opt for
the safety of repayment mortgage. Such fears are perfectly
reasonable, particularly give the publicity that has been
generated by the many people that have been forced to make
additional contributions to their investments or take out
additional policies in order to repay their mortgage on
time.
However, as long as you use fairly cautious growth assumptions
for you investment and take a long-term view of the stock
market prospects, some people believe that now is the perfect
time to take out an interest-only mortgage. They believe
that the stock market has always historically performed
well on a 20-30 year basis, meaning that the markets will
eventually get over their period of slow or negative growth.
If this were the case and markets did indeed surge again
in the future, there would be a huge amount of benefit to
be had in paying as much into your ISA, endowment, or pension
as possible. In the long term scheme of things you would
be buying up units at a relatively low price and therefore
be in a great position to benefit if or when the markets
eventually pick up again. But this is of course not without
its risks and not a strategy that should be adopted without
sound professional financial advice.
