If you are new to mortgages and what all the terms mean you might come across an interest only mortgage calculator and be swayed by the cheap repayments it appears to offer – apparently saving you money. On any mortgage calculator you can see the repayment amount should you be paying back the full loan amount over your repayment term, but often these calculators will also show you the interest only amount which will often be up to £200 cheaper and seem far more manageable.
The thing to remember about these mortgage types is that, really, an interest only mortgage doesn’t exist. Yes, you are paying back only interest every month, but you will eventually need to pay off the full capital investment and once the mortgage matures you will find that handed to you as one huge bill which requires immediate payment.
To take advantage of an interest only plan you will need to be paying into a savings account to ensure that at the end of the repayment term you have enough to pay off your full mortgage and you should bear in mind that you will also be paying interest on the full amount throughout the term of the loan. Whereas interest decreases on a full repayment loan because the amount is smaller, the interest stays the same throughout an interest only plan.
Another thing to remember with interest only mortgages is that you are taking a far more substantial long term risk. Unless you are absolutely certain you will have the full amount required to pay off the loan at the end of the term (which you can only be certain of if you already have the money – in which case you should just pay off the full mortgage as it stands) then you are gambling with whether you’ll be able to fulfil the terms of the loan. If you are wrong and do not have enough at the end of the term, you cannot even rely on selling the house to pay back the mortgage as firstly house prices rise and fall over such a long period of time and even selling the house might not bring you in enough, and secondly a number of mortgage lenders will not actually allow the sale of the house to be used to pay off the loan at the end of the repayment term.
The very safest way to pay back your mortgage is to choose a deal that you are sure you can afford, paying back the full repayment each month. If you cannot afford this then wait to buy, and save up in the meantime.
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