What Do Mortgage Lenders Mean By Interest Only?
Taking an interest only mortgage out may offer a cheaper way to purchase a property or even a remortgage of your current abode than with the conventional capital and repayment mortgage. The reason being is that borrowers are only paying off the interest charged and not the capital.
Calculating Interest Only
An example of interest only mortgage calculations would be as follows – someone borrowing £150,000 at 5% interest rate over 25 years would cost them £624pm on an interest only basis, and £878pm on a capital and repayment mortgage. The difference in monthly payments is plain to see. But you don’t get something for nothing and this is what some interest only mortgage holders have found to their cost.
However, come the eventual repayment of the mortgage at the end of the term then the interest only loan will have only paid off the interest charged which would still leave the original £150,000 outstanding. Additionally, this debt will still need to be repaid; hence a means of savings should have commenced many years ago to counter this. In comparison to this, as long as payments have been met then a repayment mortgage would have guaranteed to clear the debt.
Slight History Analysis
Interest only mortgages have been around many years and have been very common in the heyday of low cost endowment policies predominantly during the 1980’s which were sold as repayment vehicles alongside them.
So, what’s the problem with interest only mortgage deals?
Some time ago the regulators removed the requirements stipulating that if borrowers took out interest only mortgages, then the lender would have to ensure a suitable repayment vehicle was taken at inception and that monthly premiums were maintained.
The lenders even took the bold steps of taking possession of the endowment policies and keeping them in safe custody with storage facilities provided. Additionally, the mortgagee would put a charge on the endowment policy itself so that encashment could not take place without the knowledge of the lender.
However, as poor performance of these endowment became evident from 2000 onwards the sale of these life assurance policies declined.
People then began gambling on future house price rises with the hope of this being a repayment possibility over increasingly longer terms. People with interest only mortgage deals and with no repayment of capital can have the major risk in time of falling property prices. This will result in their debt being greater than the value of their home. This can be dangerous.
Retirement Options through More Details In
Interest only loans did not come under the FCA eye just as conventional loans. There are also lifetime mortgages that offer interest only options, which have caught the FCA eye and have been changed to account for the SHIP Code of Conduct. Lifetime mortgages are a product for retirees. They are designed to give a retired person more funds to live on when their pensions start to dry up. It is this type of product that can be taken out by retirees where conventional loans and interest only mortgages cannot.
Like mainstream loans, lifetime mortgages in the interest only category had a few issues. Many misunderstood the loan they were obtaining and the repayment options, actually with all lifetime mortgages and home reversion products. Home reversion is another retiree option in which a home is sold in full or partial amounts.
With the confusion in the market about these products the FCA started to regulate the industry. Many interest only and home reversion products had to leave the market due to the new regulations.
It has given way to more products for retirees though. Now you have four types of plans that are designed to help you gain tax free cash to live an easier retirement. It was necessary after the losses in retirement investments occurred due to the uncertain market.
4 Types of Lifetime Help
Drawdown is a facility based option in which you have a sum of equity released into an account. You can then use the money when needed keeping the interest from compounding until you actually need the account. It is like having an income that you can withdraw when you want. It has a limit based on housing value.
Lump sum is a rollup lifetime mortgage with the interest compounding onto the capital loan amount. You gain a larger sum of money all at once through this option.
Interest only as discussed for mainstream loans is much the same. You have to pay an interest payment during the month, but you pay the capital at the end of your life rather than in 10 years.
Enhanced options offer the largest lump sum on the premise that your illness is going to kerb your longevity.
