It is quite uncommon nowadays for people to buy property by paying the full amount. What most people do is borrow money from a lender for the purchase, and then repay them in instalments. You don’t get the ownership of the property until you pay the money back. So, if you fail, you’ll have to part from it. Thus, it’s important to clear your debt.
If you’re having trouble paying back your mortgage, you need to be quick in taking steps to deal with it. There are different types of arrangements, one of them requiring you to pay back only the interest. It can be a good way to borrow money and repay it more easily as compared to some other types. Having a deep understanding of it would help you in dealing with it and would eliminate all the concerns.
How does this arrangement work?
As the name suggests, you are required only to pay the interest that the lender has charged each month. Along with that, you have to keep saving, to pay the principal amount. That is because you have to pay for all of it at the end of the term. This is one of the three methods for repaying mortgages that are available to you. It is worth noting here that you get more flexibility in repaying this type of mortgage than the other types. You can pay some additional amount to the interest, and it will go towards writing off the principal amount. If you’re unable to do so, you can just pay the monthly interest amount.
What are the benefits you get from it?
If you are going to take out or have already taken out an interest-only mortgage, there must be a reason for that. People choose it mainly because of the benefits that it offers them. Firstly, it is clear that this arrangement offers comparably affordable monthly payments as compared to other types. This is because you have to pay only the interest charged each month. Another aspect that can benefit you is that you can pay an additional amount if you can and want. That way you also get the option to make the repayment faster. You won’t find this kind of flexibility while dealing with the other types of arrangements.
Are there any risks that you face in this arrangement?
Just like all the other types of arrangements, this one too is not all about benefits. There are naturally some disadvantages that you have to face. The first one that must be pointed out is the cost. The monthly payments may be affordable, but you must also consider what you pay overall. You would find it to be more than what you have to pay through the other payment methods.
On top of that, it is more complex to deal with as compared to other arrangements. This could be a good reason for you to look for other methods. Moreover, it is a good option for you, only if you’re sure that you’ll be able to pay the principal amount at the end.
Otherwise, you’ll end up in a very difficult situation. If you’re depending on your income, investments, etc for the repayment, there is a good chance you’ll have to face this. You’ll have to maintain your financial stability during the term and also save enough to pay the mortgage amount in the end.
Should you go for it if you’re a first-time buyer?
When it comes to an interest-only mortgage, you must always consider the means that you have to repay it. Generally speaking, someone who is taking this kind of loan out for the first time doesn’t have that. The lender would probably not feel encouraged to lend to you. Further, they will see it as a big risk, and charge you a higher rate, if not reject your application. Only those who have a net worth that’s high enough can get a good deal in this case. So, you should look for other options if it is for the first time buying property for residential purposes.
In case you’re buying to rent it out, you might be able to borrow at a decent rate from the lender. The reason is simple, that you’ll be able to pay them with the money you earn as the rent. It would still not be wise to depend only on this as it’s not a stable enough source of income. Anyway, the lenders won’t hesitate as much as they would, if you were buying the property for residential purposes.
How do you get the Best Deal on an Interest-only Mortgage?
To avoid any trouble later, in repaying your lender, in the future, you have to be careful from the beginning. So, you would naturally want to find the best deal that you can. You would like the interest rate to be as low as it can be. In that case, you should search for it through a broker.
In case, you didn’t know, you can avail the best rates from some of the lenders through brokers only. Apart from that, it will also save you some time. Otherwise, you would’ve to go through all the options by yourself, which is probably inconvenient. That’s why it is better to hand over the task to someone who knows where to get the best deals for you. Even though you’ll have to pay a fee, it would be worth it.
What if you’re having trouble repaying the loan?
Under an interest-only mortgage or any other type for that matter, you must repay the amount that you owe. Otherwise, the lender would have ownership of your property at the end of the term. If you want it to stay with you, you must take steps for the repayment without wasting any time.
There is no need to be too worried as there are some ways through which you can still make sure that the ownership of the property stays with you. You can talk with your lender and get the term extended so that you’re able to pay off your debt. This can often go quite a long way in helping you fully repay the loan. In case, you think a change in the arrangement can help you, you can request that as well.
However, this might increase the amount you pay each month. In addition to these, there are some other options as well. Further, you might need some assistance in dealing with this situation. A debt advisory service would be worthwhile if you find the right one and some of them even offer their help free of cost.
Can you repay by selling off the property?
After you buy a property, it’s value will either rise or fall. Depending on that, you have the option of selling it to pay off your loan. It would be a good option only if the value of the property rises or at least stays the same, i.e. the same rate when you bought it. In such a situation, it is possible to purchase another one after selling it. Otherwise, there would be nothing left after you pay off a part of the loan with the money. So, you might want to look for other ways out of this situation in case of negative equity.
Should you go for a remortgage?
If you’re unable to repay your lender, you might consider taking out another loan to repay the current one. However, this won’t be a good idea in all situations. Suppose you have positive equity but need a good amount of money to repay the remaining debt. In such a case, you may be able to get another mortgage.
Thus, you must understand this matter from the lender’s perspective as well. If they see that the value of your property has risen, it might assure them that you can pay them back. In the opposite case, they will see it as a big risk. So, even if you want to, you probably won’t be able to get a loan in that case.
What if the Lender misguided you about the arrangement?
Unfortunately, it is possible that a moneylender gives you the wrong information or presents it in a way that’s not right. They might do this so that you buy their product or services.
For example, your lender might not have given you sufficient information on the repayment method. You probably would have to face a lot of difficulties due to that. In such a situation, you can complain to the concerned authorities against the lender for mis-spelling the loan.