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4 Important Learnings about Interest-Only Mortgages

Interest-only mortgages are home loans that allow borrowers to pay only the principal interest for a certain period. After this period ends, the borrower must start paying the principal and interest amounts. This kind of mortgage is an attractive option for borrowers who want to keep their monthly payments low in the initial years of the loan. However, there are certain important learnings that borrowers must remember before taking out an interest-only mortgage.

They Have Lower Initial Payments but Higher Long-Term Costs

One of the main attractions of interest-only mortgages is that they allow borrowers to make lower monthly payments in the initial years of the loan. This can be especially beneficial for borrowers with a tight budget or looking to purchase a more expensive home. 

However, interest-only mortgages come with higher long-term costs. This is because borrowers are not paying any principal during the interest-only period, which means they are not building any equity in the property. As a result, the borrower may end up costing more in interest over the life of the loan.

They Have a Limited Period for Interest-Only Payments

Another important learning about interest-only mortgages is that the interest-only period is limited to a specific time frame, usually between three to ten years. This leads to a significant increase in monthly payments and may be difficult for borrowers who have yet to plan accordingly. Therefore, borrowers need to have a plan to start making principal payments once the interest-only period ends.

They Are Not Suitable for All Borrowers

Interest-only mortgages are not suitable for all borrowers. They are typically offered to those with high credit scores and large down payments. Lenders view interest-only mortgages as a higher risk than traditional mortgages. If the borrower cannot make the principal payments once the interest-only period ends, they may face foreclosure. Therefore, borrowers must have a stable source of income and a solid financial plan before taking out an interest-only mortgage.

There Are Options for Refinancing or Selling the Property

Borrowers who have taken out an interest-only mortgage may have options for refinancing or selling the property once the interest-only period ends. Refinancing the mortgage can allow the borrower to convert the interest-only mortgage into a traditional mortgage with both principal and interest payments. This can reduce the long-term costs of the loan. 

Selling the property can also be an option for borrowers who cannot make the principal payments once the interest-only period ends. This decision may only be viable if the housing market is unfavourable.

Find the Right Mortgage with Our Help

Borrowers need to understand the risks and limitations of interest-only mortgages before taking out one. Borrowers should have a solid financial plan and be prepared to make principal payments once the interest-only period ends. By keeping these important learnings in mind, borrowers can decide whether an interest-only mortgage is the right choice.

Our objective at Everest Mortgage Services is to assist each client in obtaining the appropriate mortgage offer. Even if you’re a first-time buyer or a seasoned homeowner, our team will guide you throughout the process. We will extensively search the entire market to locate the ideal deal for you, as our exceptional service has been recognised for delivering the most favourable mortgage offers. Please learn how much you can borrow for a mortgage in Brighton by talking to us right now!