How do Interest Only Mortgages Help Homeowners?

Lower Mortgage Payments Leaves Extra Cash for Household Bills

Apr 13, 2009

Interest-only mortgages help homeowners via more affordable monthly repayments. This helps free-up extra cash to help with other household bills.

An interest-only mortgage involves a homeowner making a monthly repayment to the lender based upon the accrued interest for that month alone. It is the responsibility of the borrower to make a separate arrangement for the repayment of the capital, via an investment vehicle, at the end of the mortgage term. Repayment mortgages involve making a monthly payment based on the repayment of both interest and capital.

Interest-Only Mortgages Reduce Mortgage Payments

Repayment mortgages involve making a higher mortgage payment than interest-only mortgages because the capital isn't being re-paid at that point. Families struggling to balance household bills and clear personal debt are likely to find that paying interest can help them out of a tight spot.

This £300 saving on monthly mortgage payments could be invaluable for those struggling with household bills and personal debts.

Flexibility to Help with Household Bills

Borrowers can often inter-change between mortgage types, returning to a repayment mortgage once their financial situation has improved. A number of lenders are very flexible in this regard and will allow a homeowner to switch to an interest-only mortgage to help with household bills. It is not in the interests of financial institutions to repossess homes, especially if their is minimal home equity available.

Renting a House is not Cheaper

According to financial publication the Motley Fool, house prices double every nine years. Now that Bank of England base rates are so low, an interest-only mortgage could be cheaper than renting a house. It also allows first-time buyers to enjoy long term capital growth.

Lower Monthly Payments on Buy-to-let Mortgages

Interest payments alone are normally paid under a buy-to let mortgage because investors are seeking long term capital growth; the property will be sold before capital repayment is required. Interest-only mortgages help keep monthly mortgage payments to a bare minimum and this ties in with investment objectives.

Unless a homeowner sells their property before the end of the mortgage term, the capital will need to be re-paid by a separate investment vehicle, such as a cash ISA. However, interest-only mortgages allow homeowners to enjoy lower mortgage payments than repayment mortgages. This helps people who are renting a house as it allows first-time buyers to get on the property ladder.

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