Be wise before deciding to choose the interest only loans UK

Posted by Prosper Home Loan on August 11th, 2018

Interest only mortgage means that the borrower who takes a loan needs to pay the lender the monthly interest amount only for a fixed period of time.

This means that the contribution towards the principal debt amount is not calculated as part of your monthly repayment plan. The biggest benefit of interest only mortgage is that the instalment that gets deducted from your account against mortgage is much cheaper than a normal repayment mortgage.

The downside, however is that at the end of the loan term, which is generally 5 to 7 years, the borrower has to pay back the entire loan amount to the lender or start with another mortgage pay-off plan that is inclusive of the principal amount and the interest.

The market trend in the United Kingdom this year shows that many interests only mortgage lenders 2018 are willing to take the challenge and have re-entered the market to offer interest only loans UK. That being said, the overall tendency of the market however, is its cautious approach towards giving such loans.

The primary reason being - there is a big risk that the lender takes up when he offers an interest only mortgage.

It is invariably associated with a financial uncertainty. Since the borrower is supposed to be having an investment plan in place to pay up the loan amount by the end of the term, a lot depends on how the borrower is performing financially. Some never invest and some who do may have chosen the wrong investment plan.

While some may have even ended up without a job for various reasons making it doubly unsure for the lender on the possibility of getting the capital back.

The interest only loans are good for people who have a back-up plan in the form of an endowment policy or a life insurance policy with a policy term that expires before the expiry of the term of the interest only loan UK. It is also reasonable for people who are sure that they would sell off their house in a short period of time, just in time to payback the lender of the principal amount.

As per financial estimates, about 6,000,000 interest only loans UK have their terms ending in 2020. Borrowers who have taken their mortgage under this scheme are being pursued by government financial bodies to review their investment and payback plans as early as possible and speak to their lenders in case of any issues. Some of the major drawbacks of this scheme are: -

1.     Lack of financial discipline on the part of the borrower which disables him from paying up the principal amount at the end of the term.
2.     Appreciation of the value of the house may not happen as per the expectations of the borrower.
3.     The borrower may have invested money in the wrong investment plan.
4.     The borrower would ultimately be required to settle the principal amount of loan in lump-sum or on a monthly basis that would include payment of the interest as well as the principal. The difference in the monthly installment in the latter case will be too high and can cause a payment shock to the borrower.
5.     In case there is a depreciation in the price of the house, the borrower ends up paying way too much on the mortgage vis-à-vis the actual value of his house.

There are better alternatives to interest only loans UK. Speaking to a mortgage expert can help resolve lots of queries of the borrower and provide him with proper direction to take up the right mortgage plan.