If you’re on this website, it’s likely that you’re considering buying a property. That means you’re also likely in the early stages of searching for a mortgage product that suits your needs.
That’s a difficult thing to do. With so many lenders out there, it’s often difficult to find a loan that services your needs and keeps your monthly outgoings low.
Many new buyers consider interest-only loans as the best way to get a property quickly and keep their monthly outgoings to a minimum. But are they really all that they’re cracked up to be?
This article examines the good and the bad of taking out an interest-only mortgage.
First, let’s look at the good side of things.
The most obvious pro is the lowering of your monthly outgoings. With an interest-only loan, you only pay interest for a set period of time. Usually, this is a couple of years before the loan reverts to having you repay both the principal and interest on the loan.
During this period, you may save hundreds of pounds every month because you don’t have to repay the principal. This can be a huge relief to new homeowners who’ve scrimped and saved for their properties and are already in a precarious financial position by the time that they’re ready to buy.
Moreover, this sorts of loans can be used by borrowers who want to build up a better credit history for a later house purchase. Making interest-only repayments on a smaller home may put you in a better position to buy a larger home later on down the line.
Investors often use interest-only mortgages to their advantage as well. Paying interest-only helps them to improve cash flow during the early years of the mortgage. It also means that they can save the money they would have spent on the principal to fund the purchase of another property. By the time they have to start repaying the principal, they should hopefully have a tenant in place who can cover the costs.
Coming back to the investment issue, there have been some changes that directly affect investors in recent years. As of April 2020, you won’t be able to claim the interest that you pay on a property as a deductible. This only applies if you buy the property as an individual. Companies operate under the current rules that allow them to deduct some of the interest they pay.
This may cause major issues for individuals who are looking to rely on interest-only loans to lower their tax bills.
But what about regular homeowners?
The biggest con for them is that the principal of the loan doesn’t go away. You still have to repay it. But with an interest-only loan, you’re just delaying the inevitable. When the interest-only period ends, you’ll find your monthly outgoings rocketing up. Moreover, the amount of interest that you’re paying won’t have decreased because you won’t have made a dent in your principal.
That’s the major problem. Many people spend the money that they save when they go interest-only. This leaves them unprepared for the problems that might arise later on.
The Final Word
Picking a suitable mortgage product is no simple task. You have to put a lot of thought into both your current and potential future financial position.
Don’t go interest-only just for the lower monthly outgoings. Remember that you still have to think about how your repayments change in the future. Speak to a mortgage advisor to get advice that relates to your personal situation.