An interest only mortgage is a form of secured loan whereby you will only pay for the interest on the money that you borrow. Therefore, it is necessary that you obtain a repayment vehicle or other repayment strategies which can help you in paying off the amount that you originally borrowed, when the end of the term arrives. There are some people who are getting worried if they won’t have enough money to pay for the original amount that they borrowed for their interest only mortgage.
For example if you borrowed £100,000 for your interest only mortgage and your term is 25 years, then after 25 years you should have the £100,000 saved or invested, in order to pay off the amount that you originally borrowed. There are various ways that a repayment vehicle for an interest only mortgage can be arranged. A repayment vehicle is actually an investment plan or a savings scheme. Usually this requires discipline to set aside regular savings or lump sums which builds up over the years and is assigned to provide a capital lump sum for the eventual repayment to the lender in settlement of the interest only mortgage.
Some examples of repayment vehicles are shares, investment bonds, pensions, ISAs and cash deposited in a savings account. However, lender criteria is now becoming stricter on which repayment vehicles are acceptable. Lenders are aware that some people never actually get round to setting up such schemes and therefore issues have arisen regarding none repayment at the end of the term. Consequently, there are now lenders who will no longer accept ISA’s or low cost endowment policies as a form of repayment vehicle. Some will constrain the calculation as to how much the estimated maturity figures to be by assuming the client cannot take the growth of the ISA towards the maturity figure. In such instances they will only consider the premiums paid in towards the estimated maturity value.
If you do not really know how this works then it would be best if you can talk to a financial adviser who is an expert on interest only mortgages. There are some people who are wondering how much money they should save in order to pay off for the capital. Investors gambling on the stock markets also should know that they will have to face a lot of risks when investing in repayment vehicle for an interest only mortgage.
Another example of risks could be if there are years whereby the prices of their homes are falling. This could encroach on the possibility of negative equity as the chances are your property might be worth lesser that your mortgage. Additionally, if you are paying into an investment plan or a savings then it might not grow more quickly that you have expected it to be and as a result you will have a shortfall. Due to these risks, there are some lenders which are implementing stricter criteria. There are other lenders which are having a required level for their minimum income while other lenders are requiring 50% deposit.
Speak to an independent mortgage adviser if you are considering an interest only mortgage. The market has become an uncertain one given the demands the FSA are now placing on interest only mortgage business.