Mortgage, as you know, is of two types depending on the repayment type.
1) Interest-only and,
The latter one is the most common, but the previous one, i.e. interest-only, is always a buzz for the borrowers. Full of confusion, they have many questions about it.
The information below is an effort to cover the maximum quantity of aspects on a mortgage with only interest in repayments. If you too have any plans to take a home loan with this method, the details below will be of use.
First the introduction
As the name denotes, in the interest-only mortgage, you pay only the interest applicable each month during the tenure. At the end of the loan term, you have to pay off the complete principal amount obtained from the lender.
The monthly payments are smaller when you pay only interest. It makes many people apply for the interest-only mortgage. You should opt for this option only if adequate money is available at the end of the tenure. Without any compromise, it should parallel the principal amount.
What to present to the lending company to qualify for funds?
As the principal amount comes at the end of the term, and that is huge, the lending company has many concerns. You need to fulfil all of them. The needs of the following aspects are –
- It will help if you get your repayment plan approved from the lender. The policies vary from one finance company to the other.
- According to the prevalent culture, show the detail of the investment product you have invested in. It should be promising enough to give an assured return. In the name of investment, anything from savings accounts to stock market purchasing can work.
The usual repayment methods for the end of the tenure are –
- ISA – Individual Savings Account
- Investment bonds
- Unit trusts
- Stocks and shares
- Properties and assets
- Regular saving plans
It is good that there are some options for revival if your repayment plan does not go according to the expectations.
Some common questions you may have as a borrower
Countless doubts always surround complicated decisions, and they should be solved on time. Here are some of the questions that are frequent in the minds of the borrowers, maybe you too are in the same boat.
How to apply for an interest-only mortgage?
Through direct lenders, it is possible to apply. You may also need to take the help of the brokers, as such lenders are few. With the help of an intermediary, it can be easier to find the right type of deal. You make sure to choose the brokers that charge their fee from the lender and not the fund seeker. ShineMortgages can be a correct example to mention here.
Remember, the parameter of income and debt-to-income ratio is strict in the interest-only repayment loan. As an applicant, you need to be on your toes and make sure that everything is at its right place.
Why there are less numbers of interest-only mortgages in the market?
There are two reasons for this –
- Such types of mortgages are considered risky for lenders. The final payment of the principal amount depends on the investment product that the borrower has exploited to make the repayment. If something goes wrong, the loan company may have to bear a significant loss.
- After the downfall of the global economy in 2008, many lenders took a step back from the interest-only mortgage. For a very long time, there were a minimal number of lenders with this product. However, gradually things have changed, and now several (not many) options are there.
Who can get interest-only mortgages?
Usually, the applicants of residential and buy-to-let home buying get this type of mortgage. The qualifying criteria are quite strict. Besides, it is not considered a good option for those trying getting a mortgage with bad credit in the UK. Rejection can be the first thing to come. Also for the first-time buyers too, this loan type is not advisable.
What to do if one fails to repay the mortgage?
Oh, this is an essential question as paying off a massive amount at the end becomes difficult for many. Through several ways, it is possible to tackle this mess too –
- Switch to a repayment mortgage
- Go for remortgage
- Make use of a part of your pension
- Extend the mortgage term
In case you have no control over the situation, the lender has the right to take possession of the home.
By knowing the basics, you can easily make a confident decision. The interest-only mortgage has its plus and minus points. With an equal consideration to both, you can make a correct verdict. At all the aspects, the lender must ensure your strong repayment capacity. Ensure that and approval will happen.