Mortgages. Why Interest Only Can Be A Risky Option
866
Finance > Mortgage
Mar 1, 2007
Michael Challiner -
Mortgages. Why Interest Only Can Be A Risky Option
The Council of Mortgage Lenders? figures are showing a growing trend in interest only mortgages. From January to March 2002, 9% of new mortgages were interest only. Now take the period from October to December 2005, and the amount of new interest only mortgages has risen to 23%. In the same timeframe, the number of first time buyers choosing interest only mortgages has increased from 6% to 15%.
There?s a good reason for this upturn, and that?s because the monthly payments are so much lower than with a repayment mortgage. All you have to do is pay the interest, delaying the repayment of the capital itself until the end of the mortgage term when it is paid off in full.
Getting an interest only mortgage is an easy way to avoid having to change lifestyle habits like eating out and holidays ? and having a mortgage is incredibly affordable this way. However, we think that there could be a lot of people in trouble in the future when they realise that they didn?t start saving soon enough for this eventual lump sum payment.
The Financial Services Authority (FSA) have voiced concerns about homebuyers potentially getting an interest only mortgage and not making sufficient provisions to pay off the capital, so as a result mortgage lenders have tightened up the rules on interest only mortgages. Now you need to provide proof of an alternative savings fund to cover the capital, before they will agree to lend you the money. The most common ways to save include pensions and ISAs, regular payment schemes that could potentially save more than the capital required. Of course, they may also fall short. The main danger is that the homebuyer will go and cancel the savings plan once the mortgage has been agreed.
If a borrower decides not to save money to cover the capital, the only option would be to sell the home and then buy a home of less value when the time comes to repay the capital. This is not a scenario that the FSA and lenders want to be faced with, especially as property prices cannot be depended on.
Back in the 1970s and 1980s interest only mortgages were very popular ? homebuyers would take out an endowment policy to cover the capital repayment at the end of the term. However, we all heard in the news recently about endowment policies under-performing ? many borrowers were not able to cover the capital because of an endowment shortfall. They were considered to be a ?guaranteed? way of saving, but they did not fulfil their promise. In a similar way, there?s no way to be sure that an investment product will have performed as well as is needed when it comes to paying back the capital in 20 years time.
As people realised that the endowment policies had under-performed, the whole concept of getting an interest only mortgage with a separate savings vehicle fell out of favour, and now repayment mortgages are the norm. But from the recently published statistics mentioned earlier in this article, it looks like the tide may be turning again. For some people it?s the only option. House prices are too high for many people to be able to afford the full repayment mortgage payments.
So it looks like interest only mortgages will be becoming a lot more popular again, but we think that mortgage lenders could do more to help homebuyers see the other options available to them. For example, a mortgage doesn?t have to be over 25 years ? the term can be extended to 30 or even 35 years, which would help lower the payments on a repayment mortgage considerably.
A 25-year repayment mortgage of ?125,000 at 4.9% will cost ?731.69 per month. Stretch the mortgage over 35 years instead, and the monthly payment is ?103.53 less at ?628.16. That can make the difference between a mortgage being not affordable and affordable.
Many mortgages now offer the option of overpaying when you can. So just because a mortgage is over 35 years, it doesn?t mean it will take 35 years to pay it off. Many homebuyers move house every eight to ten years as well, so the mortgage never needs to run its full course. It?s then a good opportunity to reassess how much you can afford on monthly repayments.
There are other options too, like a mortgage in which you repay half of the capital on repayment, and the rest at the end. It means you get a head start on repaying the capital, and the mortgage can always be renegotiated if you feel you can afford to pay more each month.
Our most serious advice is this ? don?t try and make a decision about something as important as a mortgage without getting advice from a professional first. There are a number of solutions so it is always best to get the whole picture from someone who knows the market well. Kings College Brokers offer mortgages and remortgages to uk residents.
There?s a good reason for this upturn, and that?s because the monthly payments are so much lower than with a repayment mortgage. All you have to do is pay the interest, delaying the repayment of the capital itself until the end of the mortgage term when it is paid off in full.
Getting an interest only mortgage is an easy way to avoid having to change lifestyle habits like eating out and holidays ? and having a mortgage is incredibly affordable this way. However, we think that there could be a lot of people in trouble in the future when they realise that they didn?t start saving soon enough for this eventual lump sum payment.
The Financial Services Authority (FSA) have voiced concerns about homebuyers potentially getting an interest only mortgage and not making sufficient provisions to pay off the capital, so as a result mortgage lenders have tightened up the rules on interest only mortgages. Now you need to provide proof of an alternative savings fund to cover the capital, before they will agree to lend you the money. The most common ways to save include pensions and ISAs, regular payment schemes that could potentially save more than the capital required. Of course, they may also fall short. The main danger is that the homebuyer will go and cancel the savings plan once the mortgage has been agreed.
If a borrower decides not to save money to cover the capital, the only option would be to sell the home and then buy a home of less value when the time comes to repay the capital. This is not a scenario that the FSA and lenders want to be faced with, especially as property prices cannot be depended on.
Back in the 1970s and 1980s interest only mortgages were very popular ? homebuyers would take out an endowment policy to cover the capital repayment at the end of the term. However, we all heard in the news recently about endowment policies under-performing ? many borrowers were not able to cover the capital because of an endowment shortfall. They were considered to be a ?guaranteed? way of saving, but they did not fulfil their promise. In a similar way, there?s no way to be sure that an investment product will have performed as well as is needed when it comes to paying back the capital in 20 years time.
As people realised that the endowment policies had under-performed, the whole concept of getting an interest only mortgage with a separate savings vehicle fell out of favour, and now repayment mortgages are the norm. But from the recently published statistics mentioned earlier in this article, it looks like the tide may be turning again. For some people it?s the only option. House prices are too high for many people to be able to afford the full repayment mortgage payments.
So it looks like interest only mortgages will be becoming a lot more popular again, but we think that mortgage lenders could do more to help homebuyers see the other options available to them. For example, a mortgage doesn?t have to be over 25 years ? the term can be extended to 30 or even 35 years, which would help lower the payments on a repayment mortgage considerably.
A 25-year repayment mortgage of ?125,000 at 4.9% will cost ?731.69 per month. Stretch the mortgage over 35 years instead, and the monthly payment is ?103.53 less at ?628.16. That can make the difference between a mortgage being not affordable and affordable.
Many mortgages now offer the option of overpaying when you can. So just because a mortgage is over 35 years, it doesn?t mean it will take 35 years to pay it off. Many homebuyers move house every eight to ten years as well, so the mortgage never needs to run its full course. It?s then a good opportunity to reassess how much you can afford on monthly repayments.
There are other options too, like a mortgage in which you repay half of the capital on repayment, and the rest at the end. It means you get a head start on repaying the capital, and the mortgage can always be renegotiated if you feel you can afford to pay more each month.
Our most serious advice is this ? don?t try and make a decision about something as important as a mortgage without getting advice from a professional first. There are a number of solutions so it is always best to get the whole picture from someone who knows the market well. Kings College Brokers offer mortgages and remortgages to uk residents.
Write a Review
Add to My Favorite
Refer it to Friend
Report Article
Other links owned by this user
You may have noiced an increase in your healh insurance premium recenly. Here we examine some of he possible reasons for his and look ino ways of combaing hem. According o he marke-research group Daamonior, medical inflaion is
Category:
The Council of Mortgage Lenders? figures are showing a growing trend in interest only tgages. From January to March 2002, 9% of new tgages were interest only. Now take the period from October to December 2005, and the amount of new interest only
Category:
The companies that loan people money then add on sky high interest rates might claim to be doing people a favour by offering them the chance to have instant cash. Instead, they are crippling the poor with debt. So says the Competition
Category:
Is it coming round to time to renew your car insurance? Do you, like 23% of car owners, just accept quote and stay with your insurer? Does it matter that premium is 5 or 10 per cent more expensive than last years? Maybe it?s just not worth
Category:
The Financial Services Authority has recently carried out a review of the way in which information and advice is given to retail customers purchasing financial products. One of the products which they considered was the sale of Critical Illness
Category:
Amnd ws 42 when she ws given the difficult news tht she hd ovrin cncer. The West Yorkshire womn received chemotherpy tretment fter dignosis, but Amnd becme one of the unlucky ones. She hd bd rection to the chemotherpy
Category:
When it comes to home contents insurance, it?s so easy to get left behind in your valuations. It?s simple enough to go through the rooms, in your mind. Lounge ? carpet, sofas, display cabinet and contents. Bedrooms, carpets again, beds, furniture ??. And
Category:
The number of people with one or more credit ds has grown at an unbelievable rate in recent years. Like the mobile phone, the credit d has become a way of life for many people, something they?d be lost without. The offer of a store
Category:
Have you filled in a life assurance application recently? There?s a little box that strikes fear into the heart of the ?slightly overweight?. It simply asks you to state your weight. Do you go straight to the scales, undress to the state of nudity and
Category:
On June 1 st 2007, the law concerning the buying and selling of houses changes. From that date onwards everyone who wants to sell a house has firstly to prepare a Home Information Pack (HIP). And if you don't? You're in the frame for a
Category:
In general, operty ices appear to be rising. Between January and May 2006, the uplift in house ices across the United Kingdom averaged 4.4%. In the event that this trend continues, then the yearly rise will be 13%. This will put the average house
Category:
Almost one pensioner in four does not have enough money to fund their retirement, research from Prudential reveals, and one property-owning pensioner in five thinks they will have to downsize to make up the difference. Along with those
Category:
Other links at Finance > Mortgage
ARM's, Buydowns, Balloons and other types of loans each have their place. Today, due to recent the recent drop in interest rates, you should primarily consider a 30 year fixed rate mortgage. The pricing is too low not to consider this financing first. A s
Category:
Buying a home for the first time can be intimidating. This article will help alleviate the fear by providing knowledge. Specific mortgage loan product recommendations are provided and explained. This article will make the reader a more informed buyer.
Category:
You may be fortunate enough to already own your dream home. From time to time though you may wish that you have additional funds on hand to help you attain your other dreams and goals. Owning a house may be the answer to your prayers in that it can provid
Category:
You've made the decision to get a reverse mortgage and you've heard that there is no income or credit qualifying so you think you will have no issues getting your loan.
Category:
Site Sponsor
Directory Statistics
Articles: 68252
Categories: 501
Yahoo Entertainment
