Pros and Cons of an Interest Only Mortgage

In the current economy it is difficult for some people to get hold of a property. It is especially difficult for young couples just starting out. There are a few options that might be considered. Regardless of the choices, the options all have pros and cons attached to them. It is therefore a good idea to weigh these up before you make any decision.

For example, the interest only mortgage offers you the option of paying off the interest and not the capital. This could be the ideal way of obtaining a property, but you need to consider the pros and cons carefully before you make the decision.

What are the Pros for an Interest Only Mortgage

It is important to note the pros, as this would be the initial reason for opting for this type of mortgage.

  • You would only pay off on the interest of the capital.
  • Thus, you do not pay anything toward the capital.
  • The monthly installments would therefore be far less than with a normal home loan.
  • You could therefore save more or pay off other debts.
  • One of the advantages of this is that you could take out an endowment policy or set up a savings account for when you reach the end of the mortgage term.
  • It is an ideal way for young first-time buyers to get into the property market, provided they follow the advice of starting a savings account or taking out an endowment policy.

What are the Cons for an Interest Only Mortgage

With this type of loan, there are a few cons to note:

  • You are only paying off the interest only, and at the end of the mortgage term, you are still saddled with the full capital to be paid. A normal mortgage would have paid off the full debt.
  • This means that you will end up with a very high installment.
  • Some hope that the property will increase in value and could be sold at a profit. However, this is entirely dependent on the property market and is therefore quite risky.
  • The fall in the property prices can cause the mortgage debt to increase. You will, in the end, have to pay more than the value of the home.

It is important to make the right decision at the start, as it would be difficult to change the contract at a later stage. It may seem that it is a great way to reduce monthly expenditure, but if you are not going to be diligent in saving, or taking out an endowment policy, you will have to deal with a much greater debt in the end. The best is to speak to others who have done this before and find out as much as you can before making this your decision.

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