Interest Only Home Loans
Interest Only Versus Repayment Mortgages
Interest only home loans are cheaper initially in terms of monthly repayments, there is no doubt about this - but don’t be seduced by these savings as you are likely to pay more for your mortgage in the long run.
Some interest-only mortgage loans have variable interest rates, where the interest you are charge is adjusted in line with market fluctuations, whilst others have the same fixed rate throughout the mortgage term. Some home loan are a mixture of the two; you are charged a discounted fixed rate for an agreed number of years, and later the rate is amended on a regular basis to reflect changes in the economy.
"Cheaper Reapyments - Variable Interest Rates"
But no matter what the interest rate, interest-only home loans all work in pretty much the way. Basically, your monthly repayments over the fixed mortgage term only contribute towards paying off accumulated interest (i.e. the extra money the lender is charging you for the loan). Once the agreed loan term is up, whether that’s 3 years or 10 years later, you are required to either repay the remaining balance (i.e. the initial amount you borrowed) or begin to repay that in monthly installments. At this time, repayments rise considerably.
Despite all this, interest-only mortgages can work for some people. For instance, if your income is made up of irregular commission payments or is significantly enhanced by a large annual bonus, you may find that an interest-only loan suits you best. For the months when your income is low, you just pay the interest, but when your pockets are a bit fuller, you can choose to pay back some of the actual loan as well as interest.
This way, you get the best of both worlds, but you do need to be fairly firm with your finances and make sure that the extra cash really does contribute towards your mortgage! Be aware that even in this example, a large lump sum is probably going to be needed at the end of the mortgage term so it is always a good idea to have some kind of investment fund running alongside your mortgage.
With any luck, your home will be a good enough investment to repay the remainder of the loan when the time comes, but this is not always the case and if the economy plummets and you are left with negative equity, you are really going to need an alternative source of money.