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Interest Only Mortgages are relatively common in the United Kingdom and are used by many to great effect. However, unfortunately in the hands of someone who fails to understand the true purpose of this type of Mortgage, an Interest Only Mortgage can be a ticking time bomb.
Due to current economic conditions people across the United Kingdom are switching to Interest Only in an attempt to reduce their monthly Mortgage repayments and rescue their finances. Although, switching to Interest Only will certainly reduce Mortgage repayments, this is not what they were intended to be used for
As the name suggests an Interest Only Mortgage allows the home owner to simply pay interest each month, but none of the capital. As such, the outstanding balance on this type of Mortgage will remain the same for the entire term of the Mortgage. At the end of the Mortgage term, the Mortgage lender will then request that the Home Owner repay the outstanding capital in one lump sum.
In order to repay the outstanding capital at the end of an Interest Only Mortgage, home owners often need to pay into an investment throughout the course of the Mortgage in the hope that this investment will yield the necessary return at the end, which they can use to repay their Mortgage lender.
Interest Only Mortgages are actually designed so that home owners can use the capital they would have been paying towards their Mortgage and invest it in the hope that the investment they have chosen not only generates enough to pay off the Mortgage in full, but actually extra. Shrewd investors have been taking advantage of this type of Mortgage for many years.
Worryingly, many home owners who have an Interest Only Mortgage do not have a relevant investment in place to enable them to pay off the capital at the end of the Mortgage term. Sadly, this will result in many of these people being forced to sell their home, ending up in severe financial difficulty or even losing their home entirely.
The most frequent reason given by home owners who are switching to Interest Only without an investment in place, is that the change is temporary and at some stage the home owner intends to switch back to capital and interest. Unfortunately, many people who switch to an Interest Only Mortgage find that they cannot afford to switch back to capital and interest later on in the Mortgage term. Equally, these home owners can rarely afford to pay into a relevant investment. This leaves these people paying the interest on a Mortgage that they have no means of repaying later on.
Some people who are on an Interest Only Mortgage plan to sell their Home in order to repay the capital at the end of the Mortgage term. Sadly, in some cases selling the property can take too long and now more so than ever people are finding that they are unable to sell their property for anywhere near the price they paid for it or for it’s true value
It may take years before the true extent of this problem reveals itself to lenders and home owners alike, but there can be no doubt that some people in the United Kingdom have an Interest Only Mortgage, which is a ticking time bomb
Are you one of them?
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