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Interest Only Home Loans
By: Gary Talon
When choosing home loans home buyers are presented with a choice of borrowing
formats. They can either select repayment home loans or interest only home
loans. Repayment home loans involve the home owner making monthly repayments
where the amount repaid includes the interest charged for that month AND a small
percentage of the capital. Interest only home loans, as their name suggests,
involves the home owner making repayments of the interest only each month. The
home owner is then required to choose an investment vehicle to build up a lump
sum that can be used to pay off the capital in one hit at the end of the home
loan term.
Why choose interest only home loans?
Interest only home loans offer several advantages to the homeowner. The most
obvious benefit of an interest only home loan is the fact that monthly
repayments will be lower than on repayment home loans. This is because the home
owner does not pay off any of the capital each month, leaving the home loans
debt at exactly the same level at the end of the loan term as it was at the
start.
To illustrate this advantage lets take home loans of £100,000 and set the
repayment terms over 25 years at the current standard variable interest rate,
which is typically 6.75%. For repayment home loans the borrower would be making
interest & capital repayments of around £700 each month. On an interest only
mortgage however the borrower would only have to repay £562.50 in interest.
That's a saving of £137.50 each month!
If you'd be struggling to meet the monthly costs of repayment home loans because
of a low income, but figure that your income will go up in future years then
taking out an interest only home loan could be ideal! Additionally, should you
choose an interest only mortgage product where early repayment / overpayment of
the interest is allowed, if only up to a certain percentage, then as your income
builds you will actually increase your chances of paying off your mortgage
early. One important point here though; if you do intend to aim for early home
loan repayment you'll need to make sure that the investment vehicle you use to
pay off the capital grows enough to meet the capital debt in time.
Other advantages of interest only home loans are tied up in the investment
vehicle itself. This is because, being an investment, it may grow more strongly
than anticipated and leave you with a lump sum even after the capital on the
home loan is repaid. However, it is only right to mention that being an
investment it could under perform too, and so is no guarantee that it will grow
sufficiently to pay off the capital owing on a borrower's home loans.
About the Author:
Gary Talon is an established finance writer and is currently working for http://www.cheapest-loans-uk.co.uk/ |