Monthly repayments on interest-only mortgages can be on average one quarter cheaper a month than other mortgages and more and more first time buyers are opting for this type of home loan.
A monthly average of 7,000 first-time buyers took out a mortgage that was interest-only last year according to the Council of Mortgage Lenders. This number is more than double what it was three years ago. First time buyers often take out these loans without declaring how they are going to pay the capital off in the future. Some first time buyers have money in savings accounts and they can use this money to pay off the cost of the house in the future, while earning interest on their savings in the present. Others choose to take out a form of endowment to help repay the capital.
Since mortgage lenders are no longer legally required to get the borrower to prove how they are going to pay off the capital the popularity of these mortgages has soared. Finance experts believe that this is due to the increased mobility of house buyers, whereby a buyer no longer looks at his home as a lifetime acquirement, but instead a stepping stone towards a dream home or as a means of investment.
The advantage of interest-only mortgages is that they are more affordable but it is necessary to plan for how you are going to pay off the capital in the future. If you fail to make adequate provisions for the future you might end up struggling to pay back the loan capital.
The double hit of high interest rates and increasing affordability issues for borrowers means that many of us having to find increasingly innovative ways to finance our mortgages and an interest only account might be a good idea for the first couple of years before switching to a fixed or tracker mortgage once you can afford to.
The one thing to beware of, however, is negative equity, where the amount outstanding on the mortgage is greater than the current value of the home. House prices have started to fall recently, and should you need to sell your home for any reason, you will be liable for the difference, rather than pocketing the profit. This may not be a problem in the short-term if you have no plans to move, but it is wisest to cover your loan repayments with insurance should anything affect your income. The prospect of losing one's home has become a grim reality for many.
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