Interest only mortgages

[OhPinchy]

I've tried the search function and key posts but can't find the posts on this topic that I know I've seen before.

I have a few friends who have been told by different mortgage brokers that an interest only mortgage is the way to go. They are all FTBs and will the properties they are purchasing will be their primary residence, so my gut reaction would be that an interest only mortgage would only suit an investment property as you never actually own the house.

But, a while back one of my friends (who I would expect to be reasonably clued in) said that he was of the same opinion but when the broker laid out the numbers it looked very good. That person ended up going for a standard mortgage, but I never got to find out what the case for getting an interest only mortgage on your own house is. If the argument for relies on the increase in value of your house over time I'd say that is very risky.

One broker mentioned that interest only mortgages on your own home will be the next big thing and predicted they will change the industry in the same manner that the launch of trackers has done. Is there any vested interest the brokers might have in this sort of mortgage (i.e. increased commission), and if not are there sufficient merits to an interest only mortgage on your own home to warrant them promoting this approach?

 

[Unregistered]

There's no difference in the commission paid between annuity and interest only mortgages. I can't see however why brokers would be recommending them over annuity mortgages or saying "they're the next thing". They are only sutiable (broadly speaking) to individuals who have the means to reduce the capital by other methods - people with other assets or those who have irregular income and want to keep their monthly expenditure low and repay lump sums instead.

Regards,

Sarah

www.rea.ie

 

[ClubMan]

See here for some informatuion about interest only mortgages for investment properties. In general I don't think that interest only mortgages for a private residence are such a good idea. Obviously repayments will be lower but at the cost of not incrementally buying equity in the property. And the mortgage principal still has to be paid off somehow at the end of the term. Mortgage protection life assurance costs will also be higher since level/convertible term rather than reducing term life assurance will be required. I would be very interested in what argument the "broker" presented in favour of interest only for an owner occupier. In fact I'd be interested to know what sort of "broker" this was (e.g. tied agent, multi-agency intermediary or authorised advisor), how independent s/he was and how s/he was remunerated from such a deal.

 

[Unregistered]

we were approved by iib for interest only it wasnt advised to go with it here is what we were told hope it helps you. its good if you havent got the money to furnish at the start but its only the interest your paying and nothing is going off the loan for max 3 years. i dont think its a good idea anyway

IIB might be of interest to you as they offer an interest only facility for
the first three years if required. Interest only basically means that you
are only paying the interest on the mortgage and the balance is not reducing
for the duration of the interest only period. It is used by first time
buyers who may want to furnish their new property and who want reduced
repayments for the first couple of months/years. You can change back to a
normal repayment mortgage at any time during the first three years.

 

[ClubMan]

nothing is going off the loan for max 3 years.

That sounds like a partial interest only mortgage for the first few years. A true interest only mortgage involves no regular capital repayments at all over the lifetime of the loan with the principal being cleared through some other means at the end of the term (or earlier if applicable).

 

[shaktoo]

and what if you intend to sell the property within a year or too if there has been an increase in the property price ( just for arguements sake)

so if you intend to sell the property as soon as it reaches a predetermined price gain ,i am talking say 5 years ,then is a interest only mortgage a better option ....

 

[Munsterdude]

This whole area of interest only mortgage has been talked about a good bit in recent years. In my view the main reason being that people seem to have larger mortgages than in previous times, hence larger montly payments. By going interest only they obviously reduce monthly outgoings. No principal amount is paid. I inherently am not very comfortable with the idea, and feel that some level of principal should be paid back in regular payments (with a couple of exceptions).
Met a client a while back, and his views set me thinking. His view was this: Pay interest only, keep the lifestyle he wanted (ie big monthly personal spending). He intended to sell his house in 4-5 years. On selling, with the strong capital growth over the last few years, he should clear his debt, and give himself a decent deposit towards his new house purchase. I tried to argue the sensible view of paying of principal....but I am not sure he wasnt wrong! (in his circumstances)

 

[emnc]

An interest only mortgage is also a lot more expensive, as much as 5.2%!! But if its for an investment property I can see the benefit of using it for the first year or two. I would not recommend it for PPR, it gives a false sense of security that ones repayments are low, and you are actually overpaying the interest, thats why the banks dont mind!!