Interest Only

One of the types of mortgage product that is caused quite a bit of controversy in recent years is the interest only mortgage. The basic concept behind this type of product is that for a fixed number of years (usually five to seven) you only pay the interest on the amount borrowed. This means that for this period of time your repayments are significantly lower. The obvious drawback here is that beyond that point your repayments are going to be significantly higher.

This can be a very useful type of mortgage if used correctly but it can also be a very destructive type of mortgage if used incorrectly. For example, if someone wishes to get involved in a small way and real estate from an investment point of view than an interest only mortgage can be useful from the point of view of keeping the repayments down in the short term. This will allow you to keep a healthier cash flow and if it’s part of your plan to resell the property before you have to start making the higher payments after the interest only period has expired then this type of situation can take the pressure off and in the short run and lead to higher profits in the long run.

If on the other hand a person were to use an interest only mortgage and the lower repayments for the initial period to simply buy a house that they can’t afford, well, this is an extremely bad use of an interest only mortgage. Unfortunately, a significant number of people have placed themselves in the latter situation in the last number of years and a lot of the controversy about this type of mortgage has come from discussion about some of the providers making it too easy for people to take out these types of mortgages when it’s obvious that it doesn’t suit them properly.

So, if you have valid cash flow reasons for looking at an interest only mortgage then it can potentially be a financially efficient form of finance. If on the other hand you’re looking at an interest only mortgage from the point of view of being able to buy a house that you can’t really afford it and you really need to rethink your strategy because this simply won’t work and could finish up being disastrous over the longer term.