Posts Tagged ‘Interest Only’
Switching To Interest Only
Monday, March 23rd, 2009Many people are starting to switch to interest only mortgage now that times are hard in the UK with regards to bills, lack of income in many household, and many costs increasing. Having an interest only mortgage is not the end of the world, infact many people consider an interest only mortgage a benefit rather than a hinder. The main benefit to an interest only mortgage is the fact that you have a lower minimum monthly payment than you would have if you had a capital and repayment remortgage product.
Many people try to make extra payments off of their interest only mortgage so that they can try to make the mortgage balance decrease just like a repayment mortgage, but with out high minimum payment every month.
For example, if you have a 30 year £150,000 mortgage with an interest rate of 6%.
Your normal capital+interest repayments will be: £908
If you switch to interest only, the repayments will fall to: £750
The main problem with an interest only mortgage is the fact that yo can get too used to having a low monthly payment every month, that you are then unable to go back to a capital and repayment mortgage due to the increase in your monthly commitments. To be safe with having an interest only mortgage it would be advisable to put the extra money that your saving on your monthly payment away in a savings account if you can, so then when you do then go back to a capital and repayment mortgage, you are used to making the full amount every month, but instead of paying the extra money into a savings account, you will be paying it off of your mortgage.
In the current climate, the temptation to choose an interest only mortgages might be higher. But, with falling house prices it can be more problematic. Falling house prices increase negative equity and with interest only mortgages the negative equity will be greater.
Some mortgage lenders offer an ability to switch between interest only and repayment mortgages (though this has probably become less common since credit crunch).
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