Mortgage Interest Only
Interest only mortgages, pros and cons.
Mortgage interest only relates to mortgages where only the interest is paid on the mortgage over the term of the mortgage. At the end of the term, the initial amount borrowed will need to be repaid to the lender. So why would anyone in their right minds want an interest only mortgage, after all, the money that you borrow has to be repaid at the end of the term!
Consider two related issues.
The first is the effect of inflation on the loan. If you take out an interest only mortgage of £100,000 for 30 years, inflation will devalue the relative spending power of that loan amount significantly by the end of the term. As an example, think historically, 25 years ago a £40 000 interest only mortgage would have bought a very nice house. If you had taken that mortgage out, you would now only have to pay your lender that amount back and your house would almost certainly be worth considerably more.
Now consider the second related issue.
If you saved the difference between the interest only mortgage and a standard mortgage or even invested the money yourself, would this have made up the difference, it should at least have made up a significant proportion and would probably have made more.
Ok, this article goes against the grain of the grey suits because this is the information that they don’t want you to hear. Inflation depletes the value of money over long periods of time significantly, if you invest in an asset that appreciates using a loan that depreciates, surely you are on to a winner. The only problem with a mortgage interest only payment schedule, is that at the end of the term, you have to repay the initial sum. There is no guarantee that the savings or investments that you make over the loan period will eventually cover the loan repayment.
Mortgage interest only loans are a risk and risks are not suitable for all. Sometimes you may believe that risk results in reward sometimes it doesn’t! At the end of the day, this is your choice and should reflect your attitude to risk. If you want to take the risk on and use the difference to repay the loan at the end of the term, then that is your choice. Remember, risk can produce rewards, but if it all goes wrong, it can produce pain as well!