Interest Only Mortgages
Interest Only Mortgages Explained
When you receive a home loan the mortgage lender will charge you an interest rate.
With an Interest only mortgage, initial repayments for the interest on the loan. When the mortgage term is complete, the original capital borrowed is still owed. To prevent loss of equity, borrowers are advised to make regular payments into an some kind of investment policy as well as their mortgage repayments.
The three main Investment policies are :-
- An ISA (individual savings plan)
- A pension
- An endowment
With an Interest only Mortgage the monthly payments are lower than a repayment mortgage as they are made up of interest, also your investment could become larger than your mortgage .
When the loan term ends, you still owe the lender the capital you borrowed at the start of the mortgage.
If your savings or investments do not cover this debt, you could face the having your home repossessed.
Types of Interest Mortgages
Interest rates for a variable rate mortgage will tie in with the Bank of England's base rate,( set monthly ). Obviously If there is an increase in the rate, there will be an increase in your mortgage repayments, but if the interest rate falls you pay less.
With a fixed rate mortgage, you are charged the same rate for a set period of time, regardless of interest rates. fixed rates for between two and five years are most common, after which time the mortgage reverts back to either the standard variable rate or a base rate tracker.
This is helpful if you are on a tight budget and need to know your monthly outgoings exactly.
A capped rate is a mix of the "variable rate" and the "fixed rate". Borrowers are keen on this type because they know that the rates they pay will never go above a predetermined level (hence "capped rate"), borrowers will however profit from lower rates when the lender's standard rate drops.