« Back

The problem of the Interest only Mortgage.

June 30, 2020 2:38 pm

Category:

At one time there was a way that you could make your mortgage repayments very cheap. In this way lots of mortgages were agreed and a system set in place that is going to prove a real issue for mortgage lenders and the borrowers it affects. It is the Interest Only Mortgage. It works like this, you borrow a mortgage amount and make payments over a term of years , usually 20 to 25 The payments you make are the interest on the amount borrowed. However, these payments do not reduce the original amount borrowed. So if your mortgage is £100,000, after 25 years you still owe £100,000. You then have to pay it back in its entirety.

Image credit

Whilst this meant low monthly payments the money never goes away. The management of such a mortgage as this required careful financial planning on the part of the borrower. Sadly with little regulation these mortgages were sold, and they were sold back then not the advice based system we have today, to people with little financial acumen. At least now with Online conveyancing quotes that side of things can be done quickly and cheaply.

Image credit

An interest only Mortgage required a repayment vehicle. In other words what you would use to repay it at the end. Whilst others had savings schemes, share portfolios and Unit trusts and investments as theirs most peoples were seriously flawed. There are many people out there with no way to repay the amount.

« Back