Interest-only is not always a bad thing

From Thomas Reeh
Following a brief surge in popularity, interest-only mortgages are generating a lot of negative interest in the media.

Interest-only mortgages have had a bit of an image problem since the endowment mis-selling problems of the 1990s. Acres of newsprint are still devoted to the problems faced by people who were mis-advised and found that their endowment policies were going to pay less than expected, while the advertising market has been kept afloat by compensation firms’ budgets.

It’s no surprise they fell out of fashion. The wisdom was that home buyers should avoid interest-only mortgages at all costs since there was no guarantee they would be able to pay off their mortgages.

So despite a booming stock market, interest-only mortgages became unpopular, with traditional repayment mortgages becoming the norm.

But over the past few years interest-only deals have started to make a comeback. With house prices so high, some buyers have identified interest-only products as a cunning way of minimising their monthly payments.

This has sparked concerns that many of the people who have taken out interest-only mortgages have no repayment vehicles in place and so face potential problems when the mortgage period ends.

Newspapers have been full of horror stories about the dangers of having interest-only mortgages and at least one lender has written to holders of such products reminding them of the need for a repayment mechanism.

But for many people, interest-only mortgages represent a good buy. Typical are those who can realistically expect significant wage increases (such as recent graduates). The deals are also of interest to buy-to-let investors as they won’t have to live in the property when the loan has to be repaid.

Many people also have significant amounts of equity in their property and interest-only products offer them a way of reducing their outlay each month.

Although these people will still need somewhere to live at the end of the mortgage period, many are now remorgaging every few years. This means it is unlikely that they will reach the end of their mortgage period, allowing them to revert to a more traditional repayment mortgage at a later date.

Clearly, interest-only mortgages are not for everyone. Holders of such mortgages must be careful that they have a strategy to ensure that they don’t get caught out at the end of the term. But as long as the buyer of the mortgage knows what they are doing and are aware of the implications of taking out such a deal, interest-only mortgages are not always a bad thing.

Thomas Reeh
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