Interest Only Mortgages: Advantages & Disadvantages
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Interest Only Mortgages: Advantages & Disadvantages
Interest only mortgages, along with tracker mortgages, are enjoying prolonged media exposure in the current economic climate. Many are enticed by interest only mortgages as this often allows for cheaper repayments when compared to repayment mortgages.
However, it is essential to understand the possible disadvantages of interest only mortgages before any decision is made, as this could lead to debt.
What are the advantages of interest-only mortgages?
There are some advantages to interest-only mortgages. These include:
- Possibility that the borrower will profit from a repayment vehicle.
- Some repayment vehicles are also tax efficient.
- Although the medium and long-term effects of interest-only mortgages must be considered, in the short term interest-only means lower repayments.
What are the disadvantages of interest-only mortgages?
- With interest-only, the borrower owes the same at the end of the loan as he or she did at the start, only the interest has been paid off.
- One of the disadvantages of interest-only mortgages is the potential for the repayment vehicle to not achieve the projected amount, therefore leaving a shortfall that the borrower must pay off to clear the loan.
- Any shortfall on the mortgage capital is the responsibility of the borrower. This has been a major problem with endowment mortgages, and has lead to them falling completely out of fashion.
- Checking the repayment vehicle regularly will allow the borrower to ensure this does not happen.
- The interest-only disadvantages will depend on the repayment vehicle, and this should be well understood and clearly discussed before a mortgage is committed to.
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